According to Wikipedia, the Tea Party movement is an American conservative movement within the Republican Party calling for a reduction of the national debt of the United States and the federal budget deficit.
The Tea Party was formed in response to the large deficits and increase in national debt run up during the Obama administration.
Their zeal for reducing deficits and national debt seems to have waned during President Trump’s tenure.
On April 9 the Congressional Budget Office (“CBO”) released its annual assessment of the federal budget and the overall economy for the ensuing decade. This assessment has been revised to consider the impact of the recent tax cuts and the Bipartisan Budget Act of 2018.
The news is not good. The CBO sees larger deficits and slower economic growth when compared to its 2017 assessment.
In 2017, the CBO projected deficits of $10.1 trillion between 2018-2027. That amount has increased to $12.4 trillion.
Furthermore, these estimates assume that current spending policies will be reduced in 2020 as required under current law. However, if Congress continues its bipartisan spending propensities, the projected ten year deficit will balloon to over $15 trillion.
An indication of Congressional sentiment toward reforming its spending proclivities can be seen by the House voting 233-184 against a recent measure proposing a Constitutional amendment that would require a balanced budget.
When I watched the testimony of CBO Director Keith Hall before the Senate Budget Committee on CSPAN, Mr. Hall stated that 60% of the increased deficit is caused by tax reductions.
Furthermore the CBO report scores the cost of the recent tax cuts at $1.8 trillion–$400 billion higher than the original estimates. Extending the personal tax breaks beyond 2025 will add another $600 billion for 2026-2028. Restoring the repealed tax provisions that were designed to create a fiscal stimulus in recessionary times will cost another $250 billion when the next recession arrives and Congress is compelled to reinstate them.
It is easy to see how tax cuts could ultimately cost the government $2.5 trillion.
As I wrote in a previous column, national debt is never paid down, but it is reduced by economic growth and inflation. Congressional Republicans tell us that tax reform will pay for itself because of the resulting economic growth.
The CBO’s analysis does not support that contention. It estimates the tax cuts will stimulate average annual economic growth by .7%. The CBO projects overall annual inflation adjusted economic growth over the period of an anemic 1.7%.
This is well below the post-war historical averages and the growth rate that Republicans promised will result from the recent tax cuts. It is consistent, however, with the growth rates experienced by the United Kingdom, Canada and other countries after they enacted similar tax cuts.
To put that in perspective, our GDP will grow by 18%-20% over the next ten years. Our national debt will grow by as much as $15 trillion (71%) over that period. Our debt will be at the highest level since 1946.
Our current national debt is about $21 trillion. Two thirds of that amount was incurred since 2001. The largest drivers of the debt increase were the war on terror and the fiscal stimulus needed to recover from the Great Recession.
These factors suggest that, if we face another military action or if we have another strong recession, the CBO estimates understate the magnitude of future deficits.
I recently spoke with one of my former colleagues in the Netherlands. He told me that the Dutch, like many other European countries, are seriously considering reducing their corporate tax rates to match the 21% US rate.
Thus, like the US, these nations will incur additional governmental debt to finance corporate tax rate cuts. This will also mitigate tax incentives for companies to relocate to the United States.
Consequently, the governmental need to issue debt will increase the cost of capital–paradoxically diminishing private sector growth by increasing its financing costs.
We already see foreign investors who are less likely to purchase US Treasuries. Most notably, the Chinese are no longer as anxious to purchase US Treasuries. Part of this may be in response to brewing trade wars.
If protectionism becomes the norm, as it was during the Great Depression, we can expect to see a contraction in the overall global economy. However, current government debt levels are substantially higher than they were in the 1930s.
During the Obama Administration, the Tea Party made a number of valid points about the deficit and the prevailing economic trends. Partially in response to their commentary, the level of deficits decreased during President Obama’s second term to an average of about $700 billion annually. The CBO analysis strongly suggests that the average deficits over the next ten years will be double that amount.
However, now that President Trump is in office, it seems as though deficits and the resulting increase in national debt don’t matter anymore. Where is the Tea Party’s outrage?
Jim de Bree is a retired CPA who resides in Valencia.