U.S. Budget Battles

By | Updated March 10, 2017 9:08 PM UTC

For years, Republicans in Congress repeated the message over and over: federal spending was out of control. To rein it in, Republican lawmakers forced one government shutdown and several near-misses; eventually they reached budget-cutting agreements with Democratic President Barack Obama that helped pare the deficit for six straight years. The new occupant of the White House, Republican Donald Trump, says he wants to rebuild America’s infrastructure and expand its military while cutting personal and corporate taxes, and shielding entitlements like Social Security. Will the congressional Republicans who loathe red ink go along? 

The Situation

Trump first budget outline is scheduled to be released March 16. It’s expected to include a request for $54 billion more in military spending next year, paid for with cuts to domestic programs. The White House is also said to be preparing a supplemental request for as much as $30 billion more for the military this year, paid for with deficit spending. Trump is preparing a full budget request for release in May; so far has said he wants to leave entitlement programs untouched. Congressional Democrats have expressed support for Trump’s campaign promises to rebuild crumbling bridges and roads and upgrade the nation’s internet and electrical grid. But they’re the minority in both chambers; Republicans are running the show. Senate Majority Leader Mitch McConnell has expressed doubts about a big government infrastructure spending plan. Trump’s budget director, Representative Mick Mulvaney, who pushed for ambitious cuts in government spending while in Congress, could reassure his fellow Republicans that Trump will take their deficit concerns seriously.

The Background

After the 2008 financial crisis, Obama signed an $830 billion stimulus package. This, along with a decline in tax revenue resulting from high unemployment, triggered explosive growth in the budget deficit. The following year, Republicans captured the House of Representatives running on a platform of fiscal restraint. In 2011, they used the fact that the government was about to hit the debt ceiling, a limit Congress sets on the amount that can be borrowed, to threaten a debt default. They’d only provide money to keep things running if Obama agreed to big spending cuts. The resulting Budget Control Act put limits on spending by the Pentagon and other cabinet departments. These caps, expected to save $1 trillion over a decade, were combined with a tax increase on the wealthiest earners to help shrink the annual deficit to $439 billion in 2015. In 2011, Obama and John Boehner, then Speaker of the House, failed to seal what was dubbed a grand bargain to raise taxes and cut spending over the long term on Medicare (health care for senior citizens) and Social Security. The Budget Control Act contained a second feature that would cut another $1 trillion — half from defense and half from domestic spending — unless a 2012 “supercommittee” came up with a similar deal. That group failed but the threatened cuts — called “the sequester” in Washington-speak — have been mostly turned off every year through Congressional votes.

The Argument

Federal debt has reached 75 percent of gross domestic product, the highest in U.S. history after the World War II period. The Organization for Economic Cooperation and Development estimated that Trump’s ideas for infrastructure investments and tax cuts could increase the budget deficit by one-half percent of GDP in 2017 and 1.5 percent in 2018. The OECD also estimates that Trump’s proposals could increase overall GDP by 0.4 percent in 2017 and about 0.8 percent in 2018. This is at the heart of the budget debate: the trade-off between current economic growth and the expense of debt interest payments over the long term. One way to keep costs down, Trump says, might be through public-private partnerships, in which companies build projects in exchange for toll-collection rights or regular government payments. Democratic critics call this a corporate welfare plan, and say it would subsidize projects that would be built anyway while less-profitable projects, like upgrading municipal water systems, would get no help. Another proposal involves rewriting the complicated tax code which fostered a wave of corporate takeovers, called inversions, designed to skirt taxes. Some of the $2.6 trillion U.S. companies have parked overseas could come home through a tax amnesty to help pay for infrastructure work. However this could probably only be achieved by cutting the 35 percent statutory corporate tax rate, and such a move would reduce future revenue. And while Trump has promised not to touch spending on Social Security and Medicare, the ranks of retirees swell by 10,000 a day. Big budget battles lie ahead.

The Reference Shelf

First published Feb. 9, 2016

To contact the writer of this QuickTake:
Erik Wasson in Washington at ewasson@bloomberg.net

To contact the editor responsible for this QuickTake:
Anne Cronin at acronin14@bloomberg.net