Committee for a Responsible Federal Budget
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What We'd Like to See in President Trump's Full FY 2018 Budget

May 19, 2017 | Budgets & Projections

After releasing its “skinny budget” in March, the Trump Administration is slated to release its full budget request outlining the President’s priorities for Fiscal Year (FY) 2018 and the subsequent decade.

The President’s first budget is a critical opportunity to translate campaign promises into specific policy proposals, and it allows us to see how the Administration sees its proposals fitting into the nation’s fiscal situation. Historically, many of the policies in the first budgets of past presidents were eventually enacted into law in some form.

The President’s full budget should have details that outline its top priorities and how to achieve them. Fiscal responsibility should be one of those priorities.

Earlier this year, we released a paper outlining the necessary elements of a fiscally responsible skinny budget. Below, we have modified that paper to reflect what should be included in a full budget. Specifically, President Trump’s first full budget should:

  1. Put Debt on a Clear Downward Path Relative to the Economy
  2. Pay for New Initiatives with Specific Offsets
  3. Use Realistic Economic Growth Assumptions
  4. Avoid Gimmicks and Unspecified Savings
  5. Propose Entitlement Reforms to Slow Cost Growth and Improve Solvency
  6. Propose Tax Reform that Grows the Economy and Raises Revenue

The President’s budget is an opportunity to shape fiscal policy over the course of his term(s) and beyond. While he will certainly aim to fulfill his campaign promises, his budget should detail the tough tradeoffs necessary to pay for them while also tackling our nation’s historic debt challenge.

The skinny budget offered a helpful starting point by including offsets for most of the President’s discretionary priorities for 2018. However, more work needs to be done to confront the 70 percent of the budget (as well as the revenue base) not addressed in the skinny budget and to prevent a rapid increase in the post-war era record-high national debt over the next decade and beyond.

Put the Debt on a Clear Downward Path Relative to the Economy

As we’ve written before, President Trump took office with debt held by the public at the largest share of the economy for any new president besides Truman. Unlike under President Truman, debt is projected to grow continuously over the course of President Trump’s term(s) and beyond.

Currently, debt held by the public totals $14.4 trillion or 77 percent of Gross Domestic Product (GDP), which is nearly twice the historical average. Under current law, debt is projected to reach $24.9 trillion or 89 percent of GDP by 2027, rising to 150 percent of GDP over the next 30 years.

President Trump should set a fiscal goal that puts the debt on a clear downward path relative to the economy over the next decade and beyond. The budget should contain specific policy proposals that meet that goal under reasonable assumptions.

There is no one right fiscal goal, and many different goals could put debt on a downward path. One possible goal would be to bring the budget into balance over the next ten years. We recently estimated that achieving this goal would require just over $8 trillion of total deficit reduction over a decade. Another option would be to reduce the debt-to-GDP ratio to 70 percent within a decade, which would require over $5 trillion in 10-year savings. These goals would become all the more difficult with costly initiatives that go unpaid for.

Pay for New Initiatives with Specific Offsets

Any new administration will enter office with its own priorities that require new spending or tax reductions. So far, President Trump has proposed building a wall on the Mexican border, strengthening the military, increasing infrastructure spending, repealing and replacing the Affordable Care Act (ACA or “Obamacare”), and reducing taxes for individuals and businesses.

Most of these initiatives would add to the already-large and growing national debt. To avoid this outcome, the budget should specify the changes the initiatives would make and propose that each is fully paid for with spending cuts or additional revenues. The President’s skinny budget took an important step in this direction by outlining $54 billion of specific non-defense discretionary cuts to offset a proposed increase in defense spending. This principle should be applied throughout the budget.

There should not be a vague promise of offsets or counting on additional growth to make up for the difference (see the next section). Any offsets should be at least as detailed as the policies they are intended to pay for.

When stuck in a hole, the first rule is to “stop digging.” Paying for new initiatives will prevent the debt from getting worse and help assure that policymakers have weighed the tradeoffs involved in pursuing any new initiatives.

Use Realistic Economic Growth Assumptions

President Trump has made economic growth a centerpiece of his agenda, and rightly so. Faster economic growth can create jobs, lift wages, strengthen retirement security, and improve the lives of individuals and families.

Faster economic growth can also improve the nation’s fiscal situation – just a 5 percent (0.1 percentage point) increase in the projected annual growth rate can reduce the debt by nearly $300 billion over the next decade.

President Trump’s budget should propose an agenda that supports economic growth, but it should use growth assumptions that are realistic and grounded in economic evidence and theory. Over the next decade, the Congressional Budget Office (CBO) estimates real GDP growth will average about 1.8 percent per year – an estimate based on current law and roughly in line with outside forecasts. As we showed in How Fast Can America Grow?, this projection – though lower than historic growth rates – is quite reasonable in light of current demographics.

Since the Office of Management and Budget’s (OMB) economic projections are based on the policies the President puts forward, it would not be unusual for their GDP projections to differ modestly from CBO’s. However, any reasonable deviation from CBO would likely be measured in basis points or perhaps decimal points, not percentage points.

Claims of 3 or even 4 percent sustained economic growth should be viewed as aspirational and have no place in any official government projection. Though the United States did achieve 4 percent sustainable economic growth in the late 1960s through the early 1970s, there is no historical precedent to suggest such growth is achievable with an aging population.

Over the long term, economic growth is driven by growth in labor, capital, and productivity. We recently estimated that achieving sustained 3 percent growth would either require productivity growth in excess of the country’s 60-year record or else it would require productivity growth, capital growth, and labor force participation to all reach or exceed the levels set in the booming 1990s. There is no justification for assuming such a high level of growth.

The U.S. should aspire to achieve as high a real growth rate as feasible, but fantasy growth projections obscure our very real fiscal challenges while setting expectations that cannot possibly be fulfilled.

Avoid Gimmicks and Unspecified Savings

The budget should show that the Administration’s policies are fiscally responsible without resorting to gimmicks or budgetary sleights of hand. Last week, we released a paper warning about a number of these gimmicks.

Past budgets have used a variety of games to hide the cost of proposals and exaggerate the savings they would achieve. Using such deception to make the budget look fiscally responsible would signal the Administration is not serious about dealing with the debt.

As a general rule, the budget should avoid relying on “magic asterisks” or other placeholders that assume budgetary savings without policies to back it up. The Administration should present specific, identifiable savings that can be measured and accounted for completely.

The budget should also avoid timing gimmicks that save money in the first decade only by pushing costs to future decades. These should not be considered a net gain for the Treasury. Similarly, temporary or one-time savings, such as asset sales, should not be used to offset permanent costs.

Finally, the budget should use a traditional current law baseline and not attempt to hide the cost of tax cuts or spending increases by burying them in the baseline. For example, if President Trump wants to preserve all expiring tax extenders and continue delaying various ACA taxes, his budget should include the $750 billion revenue loss from these proposals – not build the cost into the baseline and pretend the cost is $0.

Propose Entitlement Reforms that Slow Cost Growth and Improve Solvency

An aging population and rising health care costs will put significant pressure on the budget during and after President Trump’s time in office. Social Security and health care spending currently constitute over half of all non-interest spending and are responsible for more than three-quarters of nominal non-interest spending growth over the next decade. As a share of GDP, they are responsible for more than the entirety of projected spending growth; other parts of the budget are projected to shrink relative to the economy.

By driving up spending faster than revenue, the growth of Social Security and health care programs is a major contributor to rising debt levels. If neither grew faster than the economy over the next decade, debt would be stable and ultimately decline as a share of the economy.

The rising cost of entitlement programs also puts their internal financing at risk. Currently, Social Security spends more than it raises in dedicated revenue, and CBO projects this trend will continue (and worsen) until its trust funds are depleted (on a theoretical combined basis) by 2029. Similarly, the Medicare Hospital Insurance trust fund is projected by CBO to become insolvent by 2025 (the programs’ Trustees estimate depletion dates of 2034 and 2028, respectively).

To slow rising debt levels, create fiscal space for other programs, and ensure Social Security and Medicare solvency, President Trump should put forward significant entitlement reforms in his budget. On the health care side, he should focus on measures that encourage providers and beneficiaries to deliver and use care more efficiently in order to bend the health care cost curve downward.

For Social Security, President Trump should propose gradual and targeted adjustments to ensure long-term solvency and ultimately bring revenue and costs in line or, at a minimum, move significantly in that direction.

Importantly, there is no way to make Social Security, Medicare, and Medicaid even close to sustainable simply by reducing fraud. However, broadly defined program integrity – for example, reducing excessive provider payments and using competition or negotiation to get better prices in Medicare, restricting the ability of states to inflate their federal match in Medicaid, or encouraging and helping workers with disabilities return to work in Social Security – can represent a starting point for entitlement reform. Still, it would be impossible to fix Social Security and Medicare solely through program integrity – even using a broad definition – and, ultimately, tough choices will need to be made to bring the costs of these programs under control.

Propose Tax Reform that Grows the Economy and Raises Revenue

The federal tax code has not been reformed in over three decades and is in clear need of updating. By reducing the $1.6 trillion in annual tax breaks in the current code, thoughtful tax reform can lower tax rates, reduce distortions, improve simplicity and fairness, enhance competitiveness, promote economic growth, and help address our rising debt.

Comprehensive tax reform is an in-depth process. President Trump has already unveiled an outline for tax reform; unfortunately, the details he has put forward – if enacted alone – would prove quite costly.

The President’s outline was very specific about which taxes the President would cut but very vague on how he would broaden the tax base. The President’s budget should present the opposite – focusing more on which tax breaks they believe should be repealed or reformed than on what tax rates should be cut to.

Understandably, the Administration may not have worked out every detail of tax reform by the time it releases its budget. Nevertheless, proposals that raise revenue for tax reform should be at least as large and as specific as those that would reduce revenue.

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The President’s budget is one of the first meaningful statements of the Administration’s legislative priorities. On the campaign trail, President Trump frequently spoke out about the dangers of a high and rising national debt. His budget should include a detailed, thoughtful, and honest plan to begin addressing the nation’s historic fiscal challenges.