Why are projected budget deficits so huge?

At Vox, Dylan Matthews interviews former White House chief economist Jason Furman about the Trump budget proposal, which Furman finds alarming because while he has no problems with using large deficits to escape a serious recession, he doesn’t like President Trump’s proposal to explode the national debt when emergency measures aren’t needed. Says Furman:

We have a large budget deficit over the indefinite future. I think a lot of the problem we have is that revenue is just exceedingly low, especially for this part of the business cycle. We won’t be able to have the type of government I think we should have — or the type of budget balance that everyone, in theory, thinks we should have — if we don’t have more revenue.

To put some numbers on that, revenue is projected to be only 16.3 percent of GDP in fiscal year 2019. The only times in the past 50 years that has happened were in the aftermath of the past two recessions. Even in the 1980s, you had tax cuts and a deep recession and we were collecting more than that in revenue as a share of GDP.

The deterioration in the budget forecast relative to what was projected a year ago is largely because revenue has come down, both because the tax cut passed and because revenue collections are lower.

Finally, you can look at the spending side of the budget, and you don’t see the type of out-of-control spending growth people talk about. The amazing thing is that Medicare in 2019 will be 3 percent of GDP. In 2009, it was 3 percent of GDP. That’s despite the fact that the number of Medicare beneficiaries has gone up from 45 million to 60 million. You’ve had a 33 percent increase in Medicare beneficiaries and no increase in Medicare as a share of GDP.

Furman goes on to note that Social Security spending is up only a couple of tenths of a percent of GDP over the past ten years despite the aging population, cash welfare has gone down relative to the population and the economy, overall aid to the poor is virtually unchanged as a percentage of GDP, and even the growth of healthcare costs has slowed.

Furman isn’t entirely negative in his assessment, offering some positive comments on some of Trump’s budget proposals, but he’s clearly not happy about the long-term deficit, saying, “Now that it looks like the deficit is going to be 5 percent of GDP starting next year, which is the highest it’s ever been as a share of the economy outside of a major war or recession, I think that starts to have some costs. I don’t think the costs are huge and catastrophic. But they chip away at capital formation and increase foreign borrowing, which reduces our future national income.”

When Democrats are in office, Republicans complain about deficits and the national debt, but it’s conservative Republicans who tend to explode them. Ronald Reagan, for example, criticized Jimmy Carter for running a deficit, but then he and George H W Bush got into office and quadrupled the national debt. The debt-to-GDP ratio had gone down (or in the case of Ford held roughly steady) under every previous president since World War 2. When Clinton left office the U.S. was running a budget surplus large enough to pay off the national debt in ten years. The previous president to sign a budget bill that produced a surplus was Lyndon Johnson at the peak of the War on Poverty, and the Vietnam War, and the Apollo program.

See also this post on the causes of the previous decade’s deficit explosion.

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