One of the favorite Republican talking points is that tax cuts will “pay for themselves” by spurring economic growth. This seems plausible. But GOP talking heads underestimate just how much growth would be necessary to pay for the massive tax cuts and spending increases recently passed by Congress. In fact, the Congressional Budget Office released its analysis last week and said that the tax cut plan will “balloon” the deficit over the next several years.
And the deficit was already huge to begin with.
According to the CBO, the budget deficit – that’s spending over revenue – will expand to $804 billion in fiscal 2018. That’s up from $665 billion in fiscal 2017. By 2020, the deficit will cross the $1 trillion threshold. When the CBO extends those numbers out over the next decade, the non-partisan agency projects a cumulative deficit of $11.7 trillion for 2018-2027.
That’s nearly $12 trillion more added to the current $21-plus current national debt.
And that’s with pretty rosy growth estimates baked into the analysis. According to the CBO, real GDP will grow by 3.3% in 2018, 2.4% in 2019, and 1.8% in 2020. So, assuming relatively healthy growth with no big shocks to the economy and certainly no recession over the next three years (a pretty unlikely scenario), we’re still looking at trillions in deficit spending.
Now, the Republicans aren’t completely wrong. Tax cuts will, in fact, spur economic growth, according to the CBO. It analysis projects 0.7% growth in economic output over the next 10 years as a result of the tax reform bill. That’s good. But it doesn’t “pay for” the tax cuts.
Of course, the problem isn’t that Congress cut taxes. The problem is that it didn’t cut spending.
On top of cutting taxes, the “fiscally responsible” Republicans just enacted a $1.3 trillion omnibus bill that increased military spending $66 billion over the 2017 level and upped nondefense spending $52 billion more than last year. As Peter Schiff put it, when the tax plan passed, we got tax relief without government relief.
The national debt currently stands over $21 trillion. The CBO estimated the federal debt will approach 100% of GDP by 2028. And the CBO number is likely understated, as it leaves out a number of factors. Trading Economics calculated the 2017 debt-to-GDP ratio at 105.4%.
This means we won’t see the kind of economic growth Republicans expect. A high debt-to-GDP ratio stymies economic growth. Some studies have shown a debt to GDP ratio of over 90% can retard growth by as much as 30%. Even using the more conservative CBO number flashes giant warning signs. Last year, the CBO issued a dire forecast, saying the number could skyrocket to 150% by 2047 if the trend remains unchecked.
Peter G. Peterson Foundation Michael Peterson told Reuters the CBO analysis “confirms that major damage was done” by the tax and spending bills.
This high and rising debt matters because it harms our economy. During a time of low unemployment and economic expansion, we should be taking reasonable steps to put our debt on a sustainable path – but instead we are piling up trillions of bills.”
When you put the debt into a context of rising interest rates, things look even bleaker. If the Federal Reserve pushes forward with interest rate normalization, it will cost the US government even more money just to make its annual interest payments on the debt. That means Washington will have to borrow even more, creating a vicious cycle of skyrocketing debt and borrowing. And this doesn’t even take the bigger question into consideration: Who is going to buy all of this debt?
The Republicans have made promises they won’t be able to deliver on. Tax reform was great in theory, but we need government reform. As Peter Schiff said after the tax bill passed, as long as the government keeps growing, we are going to have to pay for it – either now or later.
Yeah, I want to lower the top rate of tax, but I also want to make government smaller. I want to reduce government spending so that we no longer need all that tax revenue. But of course, I’ve said that over and over again. This bill provides some people with tax relief, but no people with government relief. Government is getting bigger, government is getting more expensive, so how are we going to pay for it? If we’re not going to pay for it with taxes, well then we’re going to pay for it some other way. But pay for it we will.”
Editor’s note: This article by Mike Maharrey was originally published at SchiffGold.