The Congressional Budget Office dropped its highly anticipated “The Budget and Economic Outlook, 2018 to 2028” on Monday afternoon—a 166-page beach-read that makes for a salacious account of the nation’s finances. It incorporates into its ten-year outlook the major changes in fiscal policy over the last year, specifically the Tax Cuts and Jobs Act and the recently passed budget and omnibus appropriations bills.
You know where this is going.
“The deficit that CBO now estimates for 2018 is $242 billion larger than the one that it projected for that year in June 2017,” CBO writes, noting that $194 billion of that bonus shortfall stems from tax cuts. It projects the overall deficit for the current fiscal year to reach $804 billion. Trillion-dollar deficits will be reached by FY2020, earlier than CBO estimated last year. And this is all while CBO projects stronger than average economic growth of 3.3 percent in 2018 and 2.4 percent in 2019. CBO expects that rate to decline in the 2020s as the congressional stimulus wears off and interest rates rise.
Overall, the tax and spending changes enacted over the last year, even accounting for short-term macroeconomic boosts, will increase deficits $1.6 trillion over the ten-year window. Deficits had already been facing an upward trajectory due largely to the combination of medical inflation and baby boomers retiring.
But these are just the rosy estimates.
The good stuff comes on page 88 of the report, under the benign-sounding “Alternative Assumptions about Fiscal Policy” section. This is where CBO cuts the crap—the crap in this case being current-law projections. To reach all of the figures I listed above, CBO followed the letter of the law. That means it assumed that all of the individual cuts from last year’s tax bill set to expire after 2025 actually will expire, and that when this current two-year budget expires, it won’t be replaced with another budget deal, and discretionary spending will collapse.
Though we can’t know the exact specifications of what it would look like, a deal will likely be struck by 2026 that prevents most of the individual tax cuts from expiring. And once the current spending agreement that lifted spending caps expires, Congress isn’t going to let both defense and non-defense discretionary spending fall by tens of billions of dollars—especially as the current numbers, even after the recent agreement’s boost, are historically low as a share of GDP.
If Congress made permanent most of the individual tax code changes, it would deprive the government of another $650 billion in revenue over the 2018 to 2028 window—nearly all of that taking place in the final three years. If Congress eliminates or indefinitely delays certain health care taxes that it delayed earlier in the year, that would mean another $324 billion in lost revenue. On the spending side, if Congress simply grew its most recent allocations at the rate of inflation through 2028, it would add another $1.7 trillion in spending to CBO’s baseline. All told, and with debt service incorporated, CBO’s alternative assumptions—i.e., its best stab at political reality—would add another $2.6 trillion to its ten-year deficit baseline. (And that includes a generous assumption that emergency spending for disasters, like hurricanes, will revert to its recent historic average after the current, particularly disaster-filled fiscal year ends. Fortunately there are no theories out there suggesting that changing climate patterns could lead to costlier disasters.)
This will all spike during the next recession, too.
Maybe you care about deficits, maybe you think they’re overrated. But once the sugar high from tax cuts dissipates, these deficits will be President Trump and the 115th Congress’ lasting legacy. Responsibility for dealing with them, as ever, will be the transition gift handed to the next Democratic president.