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The Budget Deficit under Trump, Excluding Unicorn Effects

Summary:
The CBO has just released an assessment of the President’s budget proposal. Balancing the budget looks unrealistic, even given massively sweeping (and unrealistic) spending cuts. Here are the projected budget balances, under CBO baseline (blue), as claimed in the Budget submitted by the White House (red), and as assessed by the CBO (green). Figure 1: Federal budget balance under CBO baseline (blue), President’s budget (red), and President’s budget assessed by CBO (green), in billions of dollars, by fiscal year. Source: CBO, An Analysis of the President’s 2018 Budget, and CBO, An Update to the Budget and Economic Outlook: 2017 to 2027. Normalized by GDP under baseline CBO projections: Figure 2: Federal budget balance under CBO baseline (blue), President’s budget (red), and President’s

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The CBO has just released an assessment of the President’s budget proposal. Balancing the budget looks unrealistic, even given massively sweeping (and unrealistic) spending cuts.

Here are the projected budget balances, under CBO baseline (blue), as claimed in the Budget submitted by the White House (red), and as assessed by the CBO (green).

The Budget Deficit under Trump, Excluding Unicorn Effects

Figure 1: Federal budget balance under CBO baseline (blue), President’s budget (red), and President’s budget assessed by CBO (green), in billions of dollars, by fiscal year. Source: CBO, An Analysis of the President’s 2018 Budget, and CBO, An Update to the Budget and Economic Outlook: 2017 to 2027.

Normalized by GDP under baseline CBO projections:

The Budget Deficit under Trump, Excluding Unicorn Effects

Figure 2: Federal budget balance under CBO baseline (blue), President’s budget (red), and President’s budget assessed by CBO (green), as share of GDP, by fiscal year. Source: CBO, An Analysis of the President’s 2018 Budget, and CBO, An Update to the Budget and Economic Outlook: 2017 to 2027.

There is a lot of wishful thinking in the President’s budget. Consider a decomposition of the differences in estimates. Figure 3 shows that Economic assumptions account for the majority of the difference in estimated deficits, particuarly true in the out years (FY2020 and onward). Of the economic differences, the bulk shows up in revenues — the Administration assumes much faster income growth and hence tax revenue growth.

The Budget Deficit under Trump, Excluding Unicorn Effects

Figure 3: Federal budget balance under CBO baseline (blue), President’s budget (red), and President’s budget assessed by CBO (green), in billions of dollars, by fiscal year. Negative numbers indicate that such differences make the CBO estimate of the deficit larger than the Administration’s estimate. Source: CBO, An Analysis of the President’s 2018 Budget, and CBO, An Update to the Budget and Economic Outlook: 2017 to 2027.

One could argue that the President’s proposals would accelerate GDP growth. CBO has taken this point into consideration, specifically with respect to increased government saving leading to feedback effects.

Such economic effects would feed back into the budget and make deficits smaller than they would otherwise be. Taking into account the smaller deficits under the Presi­dent’s budget, CBO estimates that the effects of that eco­nomic feedback would further reduce deficits by roughly $160 billion over the 2018-2027 period.16 During those years, deficits would be lower by an average of about 0.1 percent of GDP because of the feedback…

The other effects arising from deregulation, health care reform, etc., were deemed too difficult to judge given the insufficiently detailed nature of the Administration’s proposals.

In other words, a plausible increase in growth is unlikely to make the deficit shrink in the way the Administration has asserted; see today’s Econofact post on the subject.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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