The Budget Deficit Under Trump, Excluding Unicorn Effects

Jul. 14, 2017 12:15 AM ETSPY, QQQ, DIA, IWM, SH, VOO, TZA, SDS, TNA, SSO, IVV, SPXU, TQQQ, UPRO, SPXL, RSP, SPXS, SQQQ, PSQ, CRF, QID, VFINX, UWM, QLD, DOG, DXD, UDOW, SDOW, SCHX, USA, TWM, URTY, DDM, VV, RWM, EPS, SRTY, ZTR, VTWO, QQQE, QQEW, FEX, BXUB, ILCB, SPLX, EQL, SPSM, EEH, BXUC, SPUU, QQXT, SFLA-OLD, IWL, SPXE, SPDN, SPXT, FWDD, SYE, UDPIX, OTPIX, JHML, PPLC, RYARX, SMLL, SPXV, HUSV, PPSC, SPXN, DUSA, USSD, ESGL, SCAP, USWD, RYRSX1 Comment

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Editor's note: This article was originally published on July 2, 2017, by Menzie Chinn here.

The CBO has just released an assessment of the president's budget proposal. Balancing the budget looks unrealistic, even given massively sweeping (and unrealistic) spending cuts.

Here are the projected budget balances, under CBO baseline (blue), as claimed in the Budget submitted by the White House (red) and as assessed by the CBO (green).

Figure 1: Federal budget balance under CBO baseline (blue), president's budget (red), and president's budget assessed by CBO (green), in billions of dollars, by fiscal year. Source: CBO, An Analysis of the President's 2018 Budget, and CBO, An Update to the Budget and Economic Outlook: 2017 to 2027.

Normalized by GDP under baseline CBO projections:

Figure 2: Federal budget balance under CBO baseline (blue), president's budget (red), and president's budget assessed by CBO (green), as share of GDP, by fiscal year. Source: CBO, An Analysis of the President's 2018 Budget, and CBO, An Update to the Budget and Economic Outlook: 2017 to 2027.

There is a lot of wishful thinking in the president's budget. Consider a decomposition of the differences in estimates. Figure 3 shows that economic assumptions account for the majority of the difference in estimated deficits, which is particularly true in the out years (FY2020 and onward). Of the economic differences, the bulk shows up in revenues - the Administration assumes much faster income growth and, hence, tax revenue growth.

Figure 3: Federal budget balance under CBO baseline (blue), president's budget (red), and president's budget assessed by CBO (green), in billions of dollars, by fiscal year. Negative numbers indicate that such differences make the CBO estimate of the deficit larger than the Administration's estimate. Source: CBO, An Analysis of the President's 2018 Budget, and CBO, An Update to the Budget and Economic Outlook: 2017 to 2027.

One could argue that the president's proposals would accelerate GDP growth. CBO has taken this point into consideration, specifically with respect to increased government saving leading to feedback effects.

Such economic effects would feed back into the budget and make deficits smaller than they would otherwise be. Taking into account the smaller deficits under the President's budget, CBO estimates that the effects of that economic feedback would further reduce deficits by roughly $160 billion over the 2018-2027 period.16 During those years, deficits would be lower by an average of about 0.1 percent of GDP because of the feedback...

The other effects arising from deregulation, healthcare reform, etc., were deemed too difficult to judge given the insufficiently detailed nature of the Administration's proposals.

In other words, a plausible increase in growth is unlikely to make the deficit shrink in the way the Administration has asserted; see today's Econofact post on the subject.

This article was written by

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James D. Hamilton has been a professor in the Economics Department at the University of California at San Diego since 1992. He served as department chair from 1999-2002, and has also taught at Harvard University and the University of Virginia. He received a Ph.D. in economics from the University of California at Berkeley in 1983. Professor Hamilton has published articles on a wide range of topics including econometrics, business cycles, monetary policy, and energy markets. His graduate textbook on time series analysis has over 14,000 scholarly citations and has been translated into Chinese, Japanese, and Italian. Academic honors include election as a Fellow of the Econometric Society and Research Associate with the National Bureau of Economic Research. He has been a visiting scholar at the Federal Reserve Board in Washington, DC, as well as the Federal Reserve Banks of Atlanta, Boston, New York, Richmond, and San Francisco. He has also been a consultant for the National Academy of Sciences, Commodity Futures Trading Commission and the European Central Bank and has testified before the United States Congress. _________________________________________________ Menzie D. Chinn is Professor of Public Affairs and Economics at the University of Wisconsin’s Robert M. La Follette School of Public Affairs. His research is focused on international finance and macroeconomics. He is currently a co-editor of the Journal of International Money and Finance, and an associate editor of the Journal of Money, Credit and Banking, and was formerly an associate editor at the Journal of International Economics and the Review of International Economics. In 2000-2001, Professor Chinn served as Senior Staff Economist for International Finance on the President’s Council of Economic Advisers. He is currently a Research Fellow in the International Finance and Macroeconomics Program of the National Bureau of Economic Research, and has been a visiting scholar at the International Monetary Fund, the Congressional Budget Office, the Federal Reserve Board and the European Central Bank. He currently serves on the CBO Panel of Economic Advisers. With Jeffry Frieden, he is coauthor of Lost Decades: The Making of America’s Debt Crisis and the Long Recovery (2011, W.W. Norton). He is also a contributor to Econbrowser, a weblog on macroeconomic issues. Prior to his appointment at the University of Wisconsin–Madison in 2003, Professor Chinn taught at the University of California, Santa Cruz. He received his doctorate in Economics from the University of California, Berkeley, and his AB from Harvard University.

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