By Steve Brawner
The economy grew 3 percent in the third quarter, which was pretty good – almost as good as the second quarter, when it grew 3.1 percent. The past four quarters, in fact, have been better than the previous four. Meanwhile, the federal budget deficit was bigger in 2017 than it was in 2016.
Hmm. That’s weird, because we’re being told that economic growth by itself reduces deficits.
Here’s the background. President Trump and congressional Republicans have been pushing for tax cuts. To get there, they needed to pass a budget that would allow the cuts to pass with a simple majority. Otherwise, the Democrats would filibuster.
The House of Representatives voted for a budget that included a framework for both tax cuts and offsetting spending cuts. On paper, the yearly deficits would end by 2027, though the overall debt, now $20.4 trillion and much bigger by 2027, would remain.
Then the Senate passed its own budget that includes a framework for tax cuts, which are popular, without spending cuts, which are not. In fact, it calls for a total of only $1 billion in cuts out of a potential $47 trillion in spending. That’s a cut of .00002 percent. If you weighed 250 pounds and were trying to lose weight, that would be .005 percent of a pound. That’s some kind of painless diet. Arkansas Sens. Tom Cotton and John Boozman voted for it. The House of Representatives, including all four members of the state’s delegation, quickly voted to shelve their own plan in favor of the Senate’s.
The thing about a budget is that it’s a framework, kind of like your household budget and mine. The real decisions are made when Congress actually spends money and enacts tax plans, just like our real decisions are made when we go to the store.
Tax cuts without spending cuts add to deficit
It seems likely that Congress will pass some kind of tax cut, and it seems certain that it will not be accompanied by a spending cut. In fact, we’re going to spend more on defense, and maybe more on the border wall, and we have to rebuild Houston and Puerto Rico. Even without those expenses, government would get bigger, paid for by credit card.
Supporters of these new tax cuts, including the president and a lot of members of Congress, assure us that’s it’s all OK. Their argument is that cutting taxes will grow the economy so much that the government will actually have more revenue – that we can have our cake and eat it, too.
Most independent economists say this just isn’t so. If you cut taxes, it does spur the economy, which is a good thing. It just won’t produce enough revenues to offset the loss from the tax cut.
Therefore, if you’re going to cut taxes, you have to cut spending, too. Otherwise, you increase the debt, now equivalent to $63,000 for every American man, woman and child. Some members of the House apparently know this is true. Otherwise, why would their first budget include spending cuts to offset the lost tax revenues?
Is economic growth enough?
So let’s go back to the past four quarters. The Department of Commerce’s Bureau of Economic Analysis reported Oct. 27 that the economy grew 3 percent in this year’s third quarter after growing 3.1 percent in the second quarter, 1.2 percent in the first quarter, and 1.8 percent in the fourth quarter of 2016. Each of those quarters was better than the corresponding quarters of the year before.
Meanwhile, the federal budget deficit – how much new debt the government creates each year on top of the $20.4 trillion we already owe – increased. For fiscal year 2017, which ended with the third quarter, the government spent $666 billion more than it collected. For fiscal year 2016, the deficit was $586 billion.
Which means that the deficit was bigger in the year when the economy was growing faster. Now we’re told faster economic growth will cause next year’s shortfall to shrink.
Not if you don’t cut spending.
© 2017 by Steve Brawner Communications, Inc.