Donald Trump tax cuts are coming home to roost, causing federal revenues to shrink and the national deficit to soar to levels only seen during major recessions or wartime, according to a new government report.
The government must borrow more than a $1 trillion in the new fiscal year, just to keep the doors open and cover tax receipts lost as a result of the tax cut, according to a fiscal year-end report by the Treasury Department.
Countries like China and Japan will put up much of the money through the purchase of U.S. Treasury bonds, likely sending interests higher across-the-board on consumer loans, home mortgages and credit cards.
While federal tax collections feel by 31 percent in the fiscal year ending Sept. 30, the federal deficit soared to $779 billion, a 17 percent increase over last year.
The Republican congress cut the corporate tax rate from 35 percent to 21, an estimated $1.2 trillion, most of which went to corporations and the wealthiest Americans. Tax receipts fell to 16.5 percent of GDP from 17.2 percent the previous year.
President Trump and congressional Republicans insist that tax revenues from faster growth will cover the cost of the tax cut. But the Congressional Budget Office (CBO) says the tax cut, effectively a massive economic stimulus, is expected to have a only short-term effect on growth.
Economic growth this year is expected to average 3.1 percent before falling back to 2.4 percent in 2019 as business investment and government purchases recede, according to a CBO analysis.
Long term, from 2023 to 2028, real GDP is projected to grow by about 1.7 percent each year. The expiration of middle class tax cuts is part of the reason, the CBO said.
Senate Majority leader Mitch McConnell and House Speaker Paul Ryan have blamed the deficit on Medicaid, Medicare and Social Security spending, even though spending rose just 3 percent during the fiscal year.
“There’s been a bipartisan reluctance to tackle entitlement changes because of the popularity of those programs,” McConnell said in an interview with Bloomberg. “Hopefully at some point here we’ll get serious about this. We haven’t been yet.”
White House economic adviser Larry Kudlow falsely claimed in June that the deficit was coming down.
Lawmakers typically enact tax cuts to stimulate the economy during a recession. The Trump tax cut came as the economy was nearing full employment, creating inflationary pressures. The Federal Reserve has acted by raising interest rates to cool the economy and ease pressure on prices.
Some economists have argued that the huge tax cut will leave the government with few options to temper a recession if the economy heads south.
After peaking at nearly 10 percent of GDP in 2009 as a result of the financial crash and Great Recession, the deficit declined as share of the economy through 2015 under President Obama.
In CBO’s forecast, the growth of actual output slows markedly after 2019 because higher interest rates, along with the slower growth of federal outlays projected under current law, will restrain demand.
Trump vowed to cut the deficit when running for president in 2016, regularly bashing Barack Obama’s economic policies. He also promised to wipe out the national debt, but the chances of that happening anytime soon are non-existent.