Trump’s budget math grapples with economic reality

President Donald Trump’s budget proposals have been defined by a belief that the economy will grow significantly faster than most economists anticipate. The latest version, released Monday, is a brief departure: It concedes, for the first time, that the administration’s past projections were too optimistic.

Then it goes right back to forecasting 3% growth, for the better part of a decade.

Trump’s $4.8 trillion budget proposal is slightly larger than last year’s $4.75 trillion request and calls for increased spending on the military, the border wall, infrastructure and other priorities, including extending the president’s 2017 tax cuts. It also includes trillions of dollars of cuts to safety-net programmes like Medicaid and discretionary spending programmes outside of the military, like education and the environment.

The White House makes the case that this is affordable and that the deficit will start to fall, dropping below $1 trillion in the 2021 fiscal year and that the budget will be balanced by 2035. That projection relies on rosy assumptions about growth and the accumulation of new federal debt — both areas in which the administration’s past predictions have proved to be overconfident.

The new budget forecasts a growth rate for the US economy of 2.8% this year — or, by the metric the administration prefers to cite, a 3.1% rate. That is more than a half percentage point higher than forecasters at the Federal Reserve and the Congressional Budget Office predict.

It then predicts growth above 3% annually for the next several years if the administration’s economic policies are enacted. The Fed, the budget office and others all see growth falling below 2% annually in that time. By 2030, the administration predicts the economy will be more than 15% larger than forecasters at the budget office do.

Past administrations have also dressed up their budget forecasts with economic projections that proved far too good to be true. In its fiscal year 2011 budget, for example, the Obama administration predicted several years of growth topping 4% in the aftermath of the 2008 financial crisis — a number it never came close to reaching even once.

Trump officials had considered their projections to be a break from that trend, writing last year that they were the first administration on record “to have experienced economic growth that meets or exceeds its own forecasts in each of its first two years in office.” That turned out to be wrong: In the middle of last year, the Commerce Department revised its accounting of the 2018 growth rate downward, to well below the rate Trump officials had forecast. Their predictions were similarly off in 2019.

Robust economic growth rates are not the only area in which the administration’s renewed optimism appears in its latest budget. It has also revised down its estimate of the interest the federal government would pay to borrow money over the next decade, based largely on the assumption that the Fed, which began cutting rates in 2019, would raise them only modestly again over the next 10 years. The changes in rate assumptions reduce budget deficits by $1.5 trillion over the course of the decade, according to the administration’s projections.

Essentially, administration officials are contending that rising levels of debt in the United States will not drive up borrowing costs, as many conservative economists have long warned, at least for the next several years. They also believe, a rarity among economists, that a sustained stretch of 3% growth would not push the Fed to raise interest rates. Administration officials do not directly control Fed policy, but in a companion document to the budget, the officials wrote that federal borrowing costs would stay low “as US debt continues to be in high demand because it is a safe haven for savings amidst global turmoil.”

As a result, the administration sees federal debt held by the public — the national debt, essentially — declining from 79% of the overall economy this year to 66% in 2030. The budget office sees it rising, to 98%, a level not reached since 1946.

In order to justify that optimism, administration officials are contending that their overly optimistic growth forecasts of the past were a fluke of circumstance.

Trump’s first budget, in the spring of 2017, predicted growth of 2.3% that year using the administration’s preferred measure — the change in the size of the economy from the fourth quarter of the preceding year. It was a mild undershoot; growth actually hit 2.5%.

The next two budgets predicted 3.1% growth for 2018 and 3.2% for 2019. Both were off, badly. Growth was 2.5% in 2018, from fourth quarter to fourth quarter, and 2.3% in 2019, according to the Commerce Department.

Officials Sunday attributed a half-point of the missed forecast last year to the effects of US trade policy — specifically, uncertainty over resolution of trade talks with China and congressional approval of a new trade agreement with Canada and Mexico. They said those uncertainties were now resolved and that growth would accelerate accordingly.

A senior administration official also said that a General Motors strike, aerospace giant Boeing’s struggles with its 737 Max aircraft and flooding in the Midwest had reduced growth by an additional three-tenths of a percent last year.

Trump has long asserted that his push to negotiate with the Chinese and reopen North American trade talks were helping the economy. In the 2016 campaign, his advisers said that tariffs on Chinese imports — even more aggressive levies than what Trump ultimately imposed on Beijing — would increase growth, by pushing multinational companies to invest in the United States instead of China.

Such an investment wave never materialised.

Capital spending growth turned negative for the last three quarters of 2019. Many forecasters believe that decline was trade-related; the budget office, among others, is predicting a bounce back in investment growth this year. But those forecasters also see growth slowing, overall, as the stimulus fades from Trump’s deficit-swelling tax cuts in 2017 and spending increases he has signed each year in office.

Partly as a result of those measures, and the administration’s inability to interest Congress in any of its most aggressive proposals for cuts, the federal budget deficit was nearly twice as large last year as the administration projected in its first budget: It topped $1 trillion last year. The Congressional Budget Office predicts it will continue to grow, hitting $1.3 trillion in 2025 as growth slows to 1.5%.

For that same year, the new Trump budget predicts the deficit will be less than half the size — and that growth will be just under 3%.

A companion document to the budget includes an alternate forecast for the full decade — with growth much closer to, but still higher than, independent economists’ projections — in the event that the administration’s proposed extensions of tax cuts, continued deregulation, reductions in certain spending programs and other policy changes are not enacted.

It notes one reason, in particular, that those efforts might not succeed this year: “2020 is an election year,” the officials write, “and there is the risk that this will distract from implementation of the necessary policies required for continued increases in prosperity.”

c.2020 The New York Times Company