Trump's Budget Sets Path to Balance but Must Prepare for Potential Pitfalls

President Trump’s first budget includes bold proposals to reform how government operates. Getting rid of unnecessary or failing programs would set the government’s finances on a path to fiscal sustainability. On the other hand, there are areas of the budget shielded from reform in the fiscal blueprint, namely defense spending (which would see an increase), Social Security, and Medicare. And if the rosy economic assumptions baked into the figures don’t hold, additional spending reforms would be needed down the road to maintain a stable fiscal footing.

The “skinny budget” preview last month laid out several discretionary spending reforms. This complete budget includes projections of federal revenue and entitlement spending over the next decade. In one refreshing change from the previous Administration’s budgets, the Trump’s proposal would lead to a small surplus in 2027. Not one of President Obama’s budget blueprints strived for fiscal balance.

For its first year, Trump’s budget proposal would see a boost in revenue of 6 percent, while growth in outlays would be limited to 1 percent. On paper, the budget deficit would decrease from $603 billion to 440 billion - a drop of 27 percent. Year two, FY 2019, would see revenues increase by 4 percent, while spending would climb by 6 percent.

Over the next ten years, tax receipts would increase 5 percent annually, while spending would be limited to 3 percent growth. If these respective levels of growth are achieved, this would roughly mirror the budget experience of the 1990s. Over that decade spending grew by 3 percent annually, and receipts by 6 percent -- which led to the last budget surplus. However, the figures are based on an assumption of 5 percent annual growth in GDP. Economic growth has surpassed 4 percent only nine times since 1980, and not since 2000.

Tax reform is a necessary ingredient for such economic expansion. The president recently published a blueprint (which NTUF reviewed here) with the principles and goals for such reform. The new budget notes that it will work with Congress to enact a revenue neutral overhaul of the tax code.

As a percentage of GDP, revenues are expected to remain relatively constant at just over 18 percent over the next decade, while spending would fall from 21 percent of GDP to 18 percent in 2027. This would match spending with the historical levels of taxes collected. On an annual rate since 1940, federal spending has averaged 20 percent of GDP, while the tax receipts flowing into the Treasury have averaged 17 percent. The government achieved a surplus in only twelve years over this period.

As NTUF tracked the cost of Trump’s proposed spending agenda during the election, we noted that he was generally more specific about where he would increase spending (i.e. defense and homeland security), than where he would seek budgetary savings. This budget fills in that gap. The budget specifies 66 programs for elimination saving $26.7 billion, plus an additional $30.6 billion in program reductions.

Significant programmatic reforms, include:

  • Air Traffic Control: Spinning off this responsibility into a non-profit corporation would spur much needed innovation, and would eliminate need most of the excise taxes that are the primary funding source for aviation programs, reducing taxes by $115 billion, and reducing outlays by $70 billion.
  • Repeal and Replace of the Affordable Care Act: The President’s budget includes support for the goals of the legislation working through Congress to reduce taxes, spending, and regulation.
  • Medicaid: The budget would allow states the option to choose between a per capita cap or a block grant. States would be given greater authority and flexibility to design Medicaid programs to suit their populations’ needs. The budget estimates that this would save $610 billion over ten years. Medicaid has been growing faster than anticipated; these reforms would slow its growth over the next decade.

* Actual

  • Agriculture: With farm bill programs coming up for reauthorization soon, the budget would protect taxpayers by limiting subsidies costs for crop insurance premiums and streamlining programs, saving $38 billion over ten years.
  • Student Loans: The budget would eliminate the Public Service Loan Forgiveness Program, a program the Obama administration sought to cap as it became likely that taxpayers could be on the hook for billions of dollars.
  • Disability Insurance: The program faces funding shortfalls starting in 2023, the budget would institute reforms to protect it from insolvency.

While campaigning, Trump often called on the federal government to reduce improper payments. The budget follows up on the pledge, but the dollar figures may be overly optimistic, forecasting reductions in improper payments reaching as much as $58 billion in 2027.

The budget also includes some major new spending initiatives:

  • $200 billion over nine years for infrastructure,
  • $18.5 billion over 10 years for a paid parental leave program, and
  • $469 billion through repeal of the defense sequester.

More could be done to reform how the Department of Defense spends money, squeezing the most out of each dollar and tackling waste and inefficient programs before adding to its budget. Also excluded from the budget are the needed reforms to protect Social Security and Medicare from their looming insolvencies. The sooner that the President and Congress move to address the programs, the easier it will be to prevent a fiscal crisis for the programs beneficiaries, and for taxpayers.