By Shawn Tully
March 14, 2017

For folks worried about America’s fiscal future, top Trump adviser Gary Cohn is riding to the rescue.

“We’re going to have to be deficit neutral over a 10-year period,” declared the former Goldman Sachs banker and White House National Economic Council Director, on CNBC in an interview following Friday’s jobs report. He added that “Yes, we’re going to be able to use dynamic scoring.”

Cohn garnered praise from CNBC guests for advocating what sounded like prudent budgeting. Another piece of info that looks like good news: The CBO on Monday said the House Republican’s health care plan could cut the deficit spending by $337 billion over the next decade.

The nation’s debt reality, however, is quite a bit different than Cohn is admitting, or the new health care estimates indicate. The reality: America is headed for a fiscal crisis that the administration—with its strong, and justified, focus on growth—isn’t addressing. “The budget projections just as they stand now are really scary,” says Brian Reidl of the conservative Manhattan Institute.

And if interest rates spike, the scenario will darken considerably. Trillion-dollar deficits will return as early as 2020. Bad!

The Trump administration’s ambitious plans for new spending, and the unknown costs of his health care law, could also push budget shortfalls beyond the already steep forecasts. Here are three areas to watch in tracking the America’s fiscal future.

Today’s Budget “Baseline” Already Looks Dangerous.

In late January, the Congressional Budget Office released its forecasts for the federal budget over the next ten years. The CBO’s “baseline” projections are extremely important because Congress is bound by a host of rules that outlaw spending and tax policies that alter the baseline. By 2023, the CBO forecasts that deficits will hit $1 trillion, as revenues remain stuck at 18% of GDP, while spending grows around 2 percentage points to 22.3%, and waxes from there. By 2027, interest on $25 trillion in debt (a $10 trillion increase) would cost $758 billion, triple today’s level, and accounting for one in every eight federal dollars spent.

But here’s the thing: These projections are the optimistic ones. They make the assumption that the 10-year Treasury peaks at 3.6% in ten years, versus its average of over 6% since 1988. If rates jump higher, and they’re already rising swiftly, deficits could easily reach $1 trillion, or a disastrous nearly 5% of GDP, by the early 2020s, and rise to $2 trillion, banana-republic territory, in a decade.

What if TrumpCare can’t pay for itself?

Congress faces two types of constraints on future budgets.

On entitlements and mandatory programs that are funded on a fixed formula, rather than subject to annual appropriations, spending and tax policy must adhere to the “PAYGO” rules. PAYGO requires that the sum of all changes in entitlement spending and taxes enacted by Congress, both for the next five and ten year periods, taken separately as scored by the CBO, cannot exceed the CBO baseline. Put simply, over the following decade, the Trump budgets can’t add more to the debt than the $10 trillion or so the CBO already projects.

The administration’s first order of business is enacting its health care plan, titled The American Health Care Act. The Senate Republicans hope to pass the AHCA, or an alternative plan to replace Obamacare, through “reconciliation,” an expedited process that alters funding for entitlements, and requires just 50 votes for adoption. But reconciliation carries its own restriction known as the “Byrd rule,” requiring that the measure adds nothing to baseline deficits and debt in the years after the 10-year budget window.

The CBO hasn’t yet scored the AHCA. But the bill could run into trouble when the CBO delivers projections on how how it could influence future debt and deficits. The AHCA repeals all of the taxes that funded Obamacare, including levies on high earners, over-the-counter drugs, and health-insurance premiums. Yet it will also be expensive, providing tax subsidies of $2000 to $14000 a year for low and medium-income families.

The Republicans are also counting Obamacare savings they’ll probably be forced to return. As written, the AHVA doesn’t replace over $700 billion in cuts in Medicare that fall heavily on hospitals. The industry agreed to the reductions because Obamacare’s rich benefits greatly increased their volumes of paying customers. Since hospitals fear the AHCA means less business, the industry will exert heavy pressure to restore the benefits to their old levels. If Congress relents, the AHCA might prove too costly to meet the PAYGO guidelines.

It may all come down to the “dynamic scoring” that Cohn advocates. The chairmen of the House and Senate Budget committees can require that methodology, so that the CBO would incorporate the AHCA’s pro-growth features that include nixing the requirement for small business to provide coverage. That could lead to a surge in hiring, as well as a tax windfall.

But the AHCA is boxed in by the combination of PAYGO and the Byrd rule. It has to pay for itself. If dynamic scoring shows that it grows baseline deficits, it will need to be reshaped, creating still more political infighting among Republicans, and giving ammunition to conservatives who favor a far less expensive measure with reduced subsidies.

Trump’s Big Spending Plans Defy “Deficit Neutrality.”

The budget’s second major category, discretionary spending, is restricted by the Budget Control Act, also known as “sequestration.” The BCA established separate caps on the two big component of discretionary, military outlays, and federal expenditures voted on each year, covering areas from education to parks to the Department of State to spending by the Department of Health and Human Services.

For 2017, the total cap is $1.07 trillion, and scheduled to fall to $1.065 trillion in 2018. It’s those caps that have restrained deficits in recent years.

Now, those restraints may burst. Trump pledges to increase military spending by $54 billion a year over a decade. That would bust the cap on defense. Of course, Trump says he plans to lower other non-defense spending by the same amount. He’s already floated the ideas of slashing budgets for the EPA and for foreign aid.

Nonetheless, in other areas Trump has big spending plans. Among his proposed initiatives: rebuilding roads and bridges, boosting benefits for veterans, providing generous grants for childcare, and bolstering border security. If Trump both spends $54 billion more on defense, and also breaks the caps on non-defense discretionary to fund his infrastructure and other plans, the deficit could rise far beyond the $487 billion projected for 2018, and speed the US towards $1 trillion in the early 2020s.

Bottom line: We can’t grow our way out of the budget crunch.

Trump has pledged to raise growth from the tepid present level of around 2%, which, by the way, is about what the CBO projects over the next decade, to at least 3%, a jump of fifty percent. So how much would a faster economy improve the fiscal outlook?

Spending is pretty much a given; it’s projected to hit 23.3% of GDP by 2027, exceeding revenues of 18.1% by a gigantic margin. According to methodology used in the President’s Budget for fiscal 2017, achieving 3% GDP growth would lift revenues to nearly 18.5%. Still, the gap would still be an unsustainable 3.9 percentage points of national income.

The irony is that Trump’s program is all about growth, and he’s proposing a raft of excellent initiatives in taxes, regulation, and infrastructure. But America is handicapped by a future in which expenditures are on autopilot to rise far faster than revenues, and faster expansion does relatively little to close the gap. “There’s no way we can grow our way out of this problem,” says Reidl. Only pro-growth policies and entitlement reform—a challenge the administration is ignoring—advancing shoulder-to-shoulder, will guarantee the kind of durable expansion that Trump promises.

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