The White House Projects the Debt Will Fix Itself
The Trump Administration has touted its recent FY 2020 President’s Budget as balancing the budget in just 15 years. However, additional budget material released yesterday shows that rosy economic assumptions – not serious spending cuts – deserve most of the credit.
The Administration's long-term budget outlook shows the budget would reach balance within 25 years under its baseline. In other words, absent any spending cuts or tax increases – and assuming the $300 billion per year extension of the 2017 tax cuts – the budget will reach balance. Meanwhile, debt as a share of GDP under the Administration's baseline will peak at over 83 percent in 2023 and then fall continuously, to below 58 percent of GDP by 2044.
These numbers, of course, make little sense given projections from the Congressional Budget Office, the Government Accountability Office, and others. Under CBO's baseline, for example, deficits will total more than 8 percent of GDP by 2044 and debt would total 129 percent. Those numbers would be closer to 10 percent and 147 percent if CBO assumed (as the Administration does) that the individual income tax provisions from the 2017 tax law are extended.
The optimistic projections in the Administration's baseline are driven largely by its extremely rosy economic forecasts. It's important to note that these economic forecasts assume enactment of the budget's proposals. Over the next decade, the Administration assumes real economic growth will average nearly 3 percent per year, while CBO aligns itself with other private and public forecasts and projects average growth of 1.8 percent. Over the long-term, the Administration assumes a growth rate of 2.7 to 2.8 percent per year, compared to CBO's 1.9 to 2.0 percent. The Administration also effectively assumes that faster growth is, contrary to the evidence, not accompanied by higher interest rates – which further improves its fiscal outlook.
Despite a number of thoughtful spending reforms, it is clear the deficit reduction in the President's budget does little to fix our fiscal situation. Instead, they rely on economic assumptions that are unlikely to materialize.