Trump, GOP Create a Debt Bomb as Deficit Swells From Massive Corporate Tax Cuts

Donald Trump Deficit

Donald Trump believes massive corporate tax breaks will lead to higher growth. But deficit projections are not encouraging. (Collage: MPG)

Donald Trump and Republicans in Congress threw caution and six decades of GOP economic orthodoxy to the wind when they passed the massive, $1 trillion tax cut for corporations and the wealthy, As a result, the nation will reap a whirlwind of crushing debt that could have implications for generations to come, according to a new analysis.

The White House Office of Management and Budget (OMB) released new projections this morning (July 18) that should raise red flags for any elected official who cares about the nation’s economic health. The federal budget deficit will hit nearly $900 billion this year, and top $1 trillion next year, according to OMB figures.

The 2019 figure would amount to 5.1 percent of the US gross domestic product (GDP), the nation’s total economic output, according to the analysis.

What’s more, it’s more than double the $526 billion the White House projected in its 2018 budget.

In times past, the GOP was the party of fiscal conservatism. But in the age of Trump, the deficit hawks have become all but extinct.

A study by the Brookings Institution in 2004 warned that the federal budget was “on an unsustainable path” because of deficits. Back then, it was alarmed that deficits would total $5 trillion by 2014.

“The scale of the nation’s projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur,” the study cautioned.

Fast forward to 2018, and the Congressional Budget Office (CBO), which also tracks the economy, now predicts the deficit will reach 5.1 percent of GDP in 2028, 7.1 percent in 2038 and 9.5 percent in 2048. Spending on Social Security, Medicare, Medicaid and interest on the national debt are cited as factors.

That’s a significant departure from historic norms.

Between 1965 and 1990 the federal deficit generally increased, from 0.2 percent of GDP in 1965 to 4.4 percent GDP in the aftermath of the 1990-91 recession. The nation’s first experiment with “trickle down economics” during the Reagan years caused a five-year bulge in deficits thanks to tax cuts and the defense buildup, according to one analysis.

The result was the 1990-91 recession, which ushered in the election of Democratic president Bill Clinton. Clinton reversed some of the tax cuts for the wealthy and deficits consistently declined year-on-year, from 3.9 percent of GDP in 1993 to a surplus of 2.3 percent GDP in 2000.

But Republican President George Bush plunged the nation back into deficit spending with the a second round of “trickle-down” tax cuts and massive spending for the Iraq war. The deficit climbed back to 3.4 percent of GDP in 2004 and soared after the Great Recession in 2007-08, topping out at 9.8 percent of GDP.

During the Obama years deficits declined to 2.4 percent GDP by 2015 and were expected to fall to 2 percent GDP through 2020. But the Trump tax cuts have changed those projections.

The deficit–accounting for the ups and downs of the economy–is expected to average 9.5 percent of GDP through 2048 compared with an average of 4.4 percent since 2000, according to the CBO.

“This deficit trajectory is also probably unsustainable, likely to bring on inflation, fiscal crisis or political crisis — or all three — well before 2048 if not addressed,” according to Justin Fox, the editorial director of the Harvard Business Review Group.

The numbers would actually be far worse except for the fact that the meager tax cuts for working stiffs in the Trump bill are supposed to expire in 2026. But Republicans are already talking about making them permanent this year in a play for votes this November.

If the tax cuts are made permanent it will add $2.5 trillion more to the national debt over the next 10 years, on top of the $2.7 trillion added by the tax cut bill and GOP spending enacted since June, according to the CBO.

The Trump administration and congressional Republicans have maintained that economic growth would counter-balance the rise in national debt. That’s the central premise of trickle-down economics. But it’s failed twice before and the early evidence suggests it will fail again.

Meanwhile, the average economic growth rate projected over the next decade has dropped under 3 percent, according to projections.

The latest figures are “a striking acknowledgement following almost two years of claims that economic growth unleashed by these policies will wipe deficits away,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

“Not only will we return to trillion-dollar deficits within two years, but they will then remain above that level indefinitely. Further, national debt held by the public is now projected to equal the size of the U.S. economy 2031,” MacGuineas writes.

In its report 14 years ago, the Brookings Institution warned about the dangers of an environment where deficits are large and permanent.

“Substantial ongoing deficits may severely and adversely affect expectations and confidence, which in turn can generate a self-reinforcing negative cycle among the underlying fiscal deficit, financial markets, and the real economy,” it stated.

Since then, the situation has only gotten worse.

The fact is tax cuts make good politics, and Republicans are counting on the short-term economic boost to overshadow their fiscal recklessness. Sooner or later, however, the Federal Reserve will have to hike interest rates to head-off inflationary pressure from what amounts to a massive over-stimulation of the economy.

Trump and congressional Republicans have planted a debt bomb in the economy that’s as deadly as any IED. It will explode sooner or later with devastating consequences for the economy.