When the “Tax Cuts and Jobs Act” was being considered in Congress this past fall, Treasury Secretary Steven Mnuchin and several congressional Republican leaders predicted a decrease in annual federal budget deficits and the federal debt—the latter of which is essentially the cumulative result of previous deficits—as a result of the new legislation. Last week, however, the nonpartisan and independent Congressional Budget Office (CBO) issued projections that show massive increases in deficits and debt relative to the projections made before the tax cut bill was considered. The broken tax bill promise, coupled with the threat that President Donald Trump and his allies will seek to address the budget hole with cuts to programs such as Social Security, Medicare, and Medicaid, should be of great concern to the American public.
Last year, administration officials and majority leadership were effusive in selling their tax plan. Secretary Mnuchin predicted that, “Not only will this tax plan pay for itself, but it will pay down debt.” Senate Majority Leader Mitch McConnell (R-KY) went on an ABC news program and said, “I’m confident this is not only revenue neutral to the government, but actually it’s very likely to be a revenue producer.” In other words, McConnell claimed that the bill would not just be deficit- and debt-neutral but that it would actually reduce deficits and the debt. Sen. Pat Toomey (R-PA) echoed this sentiment. On the night of the bill’s vote, he told colleagues on the Senate floor: “I am convinced that when we pass this legislation and it is signed into law, the Federal budget deficits will shrink as a result of this legislation.” It is critical to note that these congressional GOP leaders did not simply predict that deficits and debt would be level as a result of enacting the tax cut bill; they predicted that they would actually fall. Those predictions were dramatically out of line with the official estimates of the final bill from the CBO and the Joint Committee on Taxation (JCT), which projected that the bill would add $1.5 trillion to deficits over the next decade, or $1.1 trillion including macroeconomic effects—the official estimates did not include the cost of extending tax cuts beyond their expiration dates, or additional interest on the debt. Multiple independent analyses of the tax bill also predicted that it would add at least $1 trillion or more to deficits.
Last June, before the tax cut bill was considered, the CBO predicted that the federal deficit in the upcoming fiscal year—FY 2019—would be $689 billion. Last week, it issued its new projections for the federal budget and the economy, which estimated a dramatic rise in deficits and debt compared with the agency’s earlier projections. The CBO estimated that the federal deficit would be $980 billion in FY 2019, a 42 percent increase. Moreover, the CBO estimated that the deficit will exceed the iconic $1 trillion figure in FY 2020 and beyond. In addition, the increase for FY 2027—the end of the 10-year budget window—is substantial. Last June, the deficit in FY 2027 was estimated at an already large $1.463 trillion. Last week, the CBO estimated that if current policies for revenues and outlays—including the tax cut—are continued through FY 2027, the deficit in FY 2027 will be a massive $1.851 trillion, a sizeable 27 percent increase.* (see Author’s note)
One can better understand the full impact of these huge deficits by examining federal debt held by the public as a percent of gross domestic product (GDP). Today, such debt is projected to be 78 percent of GDP by the end of FY 2018. Disturbingly, the CBO now projects that if current policies for revenues and outlays—including the tax cut—are continued throughout the next 10 years, federal debt will be an enormous 105 percent of GDP at the close of FY 2028.** This would be the highest such percentage since 1946, when the huge costs of World War II ballooned federal debt.
There are at least two major reasons for these increased projections.
First, more information is now available about the effects of enactment of the tax cut legislation. During the debate on the bill, the CBO and JCT estimated that its enactment would dramatically increase federal deficits and debt. Now that several months have elapsed since the bill’s signing into law, there has been opportunity to update how much estimates of receipts may have changed due to the changes in the law. For example, the CBO reduced its estimates of receipts of individual income taxes for 2018 because of the new withholding tables issued by the IRS in January 2018. Although the CBO and JCT project that real GDP will be a little higher in 2027 than estimated in the absence of the tax cut, they see no signs of huge increases in real GDP, productivity, investment, and wages, which were promised by the proponents of the tax cuts in order to sell this massive giveaway to corporations and the wealthiest Americans. The CBO now projects that the tax bill will add $1.9 trillion to deficits from FY 2018 through FY 2027, or $1.4 trillion including macroeconomic effects—with neither figure including the cost of additional debt service. The cost of the tax bill will be much more if expiring provisions are extended. In other words, as expected by most serious analysts, the tax cuts will not come close to paying for themselves.
Here is another way to look at the estimates. Last June, the CBO had forecast that real GDP would increase by an average of about 1.9 percent per year during the next 11 years. The proponents of the tax bill, such as Sen. Dan Sullivan (R-AK), claimed that the CBO’s projections were too low. Sullivan made the particular argument that the CBO’s projections were not high enough because in past years real GDP growth was often 3 percent or more. Unfortunately, these analyses overlooked an important economic point. Real GDP growth is the sum of two numbers: productivity growth and growth in the size of the labor force. Over the next 11 years, growth in the labor force is projected to be only about 0.5 percent per year as the baby boomers are retiring and the female labor force participation rate has reached a plateau. Meanwhile, productivity is projected to grow by about 1.4 percent per year. Thus, the CBO’s new report continues to project that real GDP will increase by about 1.9 percent a year, which is similar to its projection from last June.
The second reason for the increased projections is that legislation enacted on February 9, 2018, will increase projected discretionary spending over the next 11 years and beyond. The spending bill, which was called “The Bipartisan Budget Act of 2018,” directly undid damaging cuts to nondefense discretionary spending in FY 2018 and FY 2019 and made room for important increases in those years while also increasing defense spending by $80 billion in FY 2018 and by $85 billion in FY 2019. Moreover, under the CBO’s alternative fiscal scenario, which assumes that current policies in FY 2018 are maintained from FY 2019 through FY 2028 for mandatory spending, discretionary spending, and revenue—including extending the expiring provisions of the tax bill—the increase in discretionary spending in FY 2018 would be carried forward into each of the subsequent 10 years, plus amounts to cover inflation. If this were to occur, the deficits in those 10 years would be much larger than the more standard CBO projections of deficits, which only account for the costs explicitly stipulated in current law. Therefore, debt at the end of FY 2028—the close of the 10-year period—would also be much higher: 105 percent of GDP.
The CBO is now projecting a dramatic increase in federal deficits and debt relative to its estimates last June, before the tax cut bill and the Bipartisan Budget Act were considered. This contradicts forecasts from the Trump administration and congressional majority leaders. Ultimately, what makes the current fiscal situation truly unfortunate is that the tax cut bill represents money thrown down the drain—or worse, a wealth transfer upward—rather than an investment in productivity enhancements, poverty reduction, and other needed public goods. This waste of America’s fiscal capacity should be a source of regret for those who have long claimed to be good stewards of America’s balance sheet.
Alan Cohen is a senior fellow at the Center for American Progress.
*Author’s note: The CBO provides deficit and debt estimates in at least two different ways. By statute, the CBO must provide “current law” estimates, which assume that the letter of the law is followed. For example, if a law is sunset after a certain number of years, the CBO must assume that the sunset occurs, even if it is politically unlikely to take place. In last week’s report, the CBO also provided “current policy” estimates, which assume that current policy continues if it is politically likely to do so. The CBO numbers from last week’s report that are used in this column are the CBO’s current policy estimates, which the CBO refers to as its “alternative fiscal scenario.” The $1.851 trillion figure also uses a calculation by the author.
**Author’s note: The 105 percent of GDP figure for the debt is also a current policy estimate.