The Trump Administration released the President’s FY 2018 Budget on Tuesday, May 23, launching a contentious and consequential debate over America’s priorities.
Most analysts would agree that projected deficits are unsustainable. Annual federal deficits, under current policies, are projected by the nonpartisan Congressional Budget Office (CBO) to increase from nearly $500 billion in FY 2018, to $1 trillion in 2022, to $1.4 trillion in 2027. Federal debt (owed to the public) is projected to rise from 77% of GDP in 2018 to 89% in 2027, 113% in 2037, and 150% of GDP in 2047; and within 10 years, annual federal interest payments will exceed three-quarters of a trillion dollars.
All of this underscores the need for long-term stabilization of debt as a percent of GDP. However, as explained below, the Trump Budget’s claim to balance the Federal budget is based on unrealistic economics, dubious savings, unfunded investments, ignoring trillions in tax cuts, and spending cuts impacting the most vulnerable Americans and those who have fallen on hard times.
In terms of budget priorities, the Trump Budget backs away from: safety net programs for low-income Americans; guaranteed health insurance; investments in infrastructure and R&D that grow the economy; protection of food, drugs, and the environment; and stabilizing global hot spots through American diplomacy and leadership — while, at the same time, calling for trillions in tax cuts primarily benefiting affluent Americans.
We are heading for more partisan gridlock and perhaps another government shutdown. It is time for a serious, blue-ribbon commission to develop a bipartisan plan to stabilize the long-term debt and to do so in a way that accommodates long-term investments in our people and our infrastructure, while protecting the most vulnerable Americans and those who have fallen on hard times.
The longer we wait to develop a fair and sensible budget, the harder it becomes. That’s a nonpartisan fact.
Top 10 Things You Should Know about the Trump Budget
- Medicaid Cuts
- Social Security Disability Cuts
- Other Significant Entitlement Cuts
- Cuts in Education Investments
- Major Domestic Discretionary Cuts and Eliminations
- Defense Increased; Diplomacy and Humanitarian Aid Cut
- Ignores Revenue Losses from Tax Cuts
- Budget Aims for “Jobs and Growth” but Infrastructure and other Initiatives are Unfunded
- Balanced Budget Claims based on Unrealistic Economics, Dubious Savings, Unfunded Tax Cuts, and Unlikely Offsets
- How the Process Will Unfold: Government Shutdown, Budget Reconciliation, Debt Ceiling
Understand this first: The Federal Budget divides all spending into two broad categories.
- About 30% of federal spending is called “discretionary spending,” because the amount of spending flows from annual funding decisions by Congress’ Appropriations Committees. Discretionary funding levels are set in 12 Annual Appropriations Bills — sometimes enacted separately, but typically packaged together. Appropriations must be enacted before a new fiscal year begins on October 1, otherwise most of the government shuts down.
- The other 70% of the budget is called “mandatory spending,” because the amount of outlays flow from legal obligations of the federal government established in law by Congress’ authorizing committees. Most mandatory spending is comprised of “entitlement” programs – such as Social Security, Medicare, and Medicaid – where the number of eligible individuals and benefit formulas determine outlays.
- Before Obamacare, Medicaid was a jointly-funded federal-state program that paid for health care services for certain categories of low-income Americans at or below the Federal Poverty Level (FPL) — primarily families with children, low-income elderly in nursing homes, and people with mental or physical disabilities. The 32 States that accepted Obamacare’s Medicaid expansion now cover all low-income people up to 138% of the Federal Poverty Level.
- Trump Budget would phase out the Medicaid expansion, eliminating healthcare for millions of newly-covered Americans.
- As in the House-passed health bill, the Budget would scale back the underlying Medicaid program by making it a ”capped entitlement,” under which federal reimbursements to States for enrollee health expenses would no longer be open-ended; instead, the payments would be “capped” and would grow more slowly than projected medical inflation. This change, plus repeal of the Medicaid expansion, would cut overall Medicaid spending by more than $800 billion over 10 years.
- This is directly contrary to the promise of Candidate Trump in June 2015 to “save Medicare, Medicaid and Social Security without cuts. Have to do it.” “I was the first & only potential GOP candidate to state there will be no cuts to Social Security, Medicare & Medicaid.” Trump tweeted in May 2015.
2. Social Security Disability Cuts
- Proposed cuts in Social Security Disability are another departure from campaign promises.
- Social Security consists of two separate parts: Old Age and Survivors Insurance (OASI) with outlays of $817 billion; and Disability Insurance (DI) with outlays of $150 billion.
- Disability Insurance provides monthly cash benefits for disabled workers (and their dependents) who have paid into the system, met minimum work requirements, and qualify as unable to engage in “substantial gainful activity” due to a physical or mental impairment. Monthly benefits are paid to disabled workers (who have not yet reached retirement age) and their families. Average monthly benefits for disabled workers: $1,166 in 2016.
- Trump budget proposes $9.9 billion in Social Security Disability cuts, and $72 billion overall in budget savings from disability programs.
- Procedural Note: Under congressional budget rules, Social Security cuts cannot be included in a filibuster-proof Budget Reconciliation Bill.
3. Other Significant Entitlement Cuts (billions of $ over 10 years)
- Food Stamps (now known as SNAP) ($193b)
- Federal Retirement: Increased Contributions and Reduced Benefits ($147b)
- Student Loans: Income-Driven Repayment Plan ($76b)
- Medical Liability Reforms are Assumed to Yield Savings in Medicare, Medicaid, FEHB ($55b)
- Postal Service Subsidies ($46b)
- Veterans Benefits: Reduce COLAs and Terminate IU upon Reaching Social Security Retirement Age ($42b)
- Child Tax Credit and Earned Income Tax Credit – Require SSN to Receive Benefits ($40b)
- Farm payments ($38b);
- Temporary Assistance for Needy Families, TANF ($22b)
- New Pension Benefit Guaranty Corporation User Fees ($21b)
- Sell half of the Strategic Petroleum Reserve ($17b)
- Eliminate Social Services Block Grant ($16b)
- Unemployment Insurance ($13b)
- Supplemental Security Income (SSI) ($9b)
- National Flood Insurance program ($9b)
- Consumer Financial Protection Bureau ($7b)
- Food Safety and Inspection Service ($6b)
- Increased Spectrum License Fees ($4b)
4. Cuts in Education Investments
- Overall, cuts spending for student financial aid by $143 billion over ten years
- Eliminates subsidized education loans ($39b)
- Eliminates Public Service Student Loan Forgiveness ($27b)
- Fails to adjust Pell Grant awards for inflation
- Significant cuts to grant aid and Work-Study
- Eliminates the Public Service Loan Forgiveness program
- $8 billion overall cut to Department of Education discretionary programs for 2018
5. Major Domestic Discretionary Cuts and Eliminations
- The Budget cuts $54 billion (11%) from non-defense discretionary (NDD) programs in FY 2018, with more cuts in each subsequent year. By 2027, the budget provides only $367 billion for NDD – $152 billion below the current 2017 level and a cut of nearly 30 percent before adjusting for inflation.
- Largest Cuts in Departments and Agencies: State Dept. and USAID, 32%; EPA, 30% ($2.5 billion); Army Corps of Engineers, 29%; Agriculture, 21%; Labor, 20%; Centers for Disease Control, 17%; Transportation, 17%; Health and Human Services, 16%; Commerce, 15%; Housing and Urban Development, 12%; Small Business Administration, 11%; Interior, 11%.
- Non-Defense Discretionary Eliminations: Economic Development Administration; NOAA grants; 21st Century Community Learning Centers; Federal Supplemental Educational Opportunity Grants; Impact Aid; Effective Instruction State Grants; ARPA-E energy research; Agency for Healthcare Research and Quality; Community Services Block Grant; Health Profession and Nurse Training Programs; Low-Income Home Energy Assistance Program (LIHEAP); Community Development Block Grant (CDBG); HOME Investment Partnership; Senior Community Service Employment Program; International Development Assistance; PL 480 Food Aid; Global Climate Change Initiative; TIGER Infrastructure Investments; Energy Star to promote energy efficiency; EPA grants to States; NASA Earth Science Missions and Office of Education; AmeriCorps; Senior Service Corps; Corporation for Public Broadcasting; Legal Services Corporation; National Endowments for the Arts and Humanities; Neighborhood Reinvestment Corporation; Overseas Private Investment Corporation; Appalachian Regional Commission; US Trade and Development Agency.
- Non-Defense Discretionary – Major Program Reductions: USDA Conservation Operations; Rural Development; Federal Work Study; Applied Energy Programs at DOE; user fees that fund the Food and Drug Administration’s protection of food and drug safety; National Institutes of Health; NIOSH; Low-Income Rental Assistance; Federal Prison Construction; Global Health Programs; Overseas Contingency Operations; Peacekeeping; Transportation Capital Investment Grants; Essential Air Service; Amtrak; Community Development Financial Institutions Fund; Environmental Protection Agency grants, enforcement, R&D, and Superfund toxic waste cleanup; National Science Foundation Grants; Animal and Plant Health Inspection Service.
6. Defense Increased; Diplomacy and Humanitarian Aid Cut
- Background: U.S. currently spends more on defense than the next seven countries combined (China, Saudi Arabia, Russia, United Kingdom, India, France, Japan); and the Administration has called on allied nations to shoulder more of the burden.
- Administration has also called for closer scrutiny of federal programs and measuring program-performance against goals.
- However, the Administration is calling for a precipitous and sizable 10% increase in defense spending in FY 2018 alone — $54 billion above the defense cap in current law — without first analyzing how additional defense dollars can be shifted to the “tip of the spear”; without explaining why current resources are insufficient to fulfill vital national security obligations; and without first seeking greater burden-sharing from allies.
- At the same time, the Budget withdraws support for diplomacy and humanitarian aid as a means of stabilizing global hot-spots (sometimes called “smart power”), instead calling for an overall FY 2018 cut at Dept. of State and USAID of 30%.
7. Ignores Revenue Losses from Tax Cuts
- Reiterates the intention to propose tax cuts and reforms, but does not provide any revenue estimates — which is highly unusual for a document required to lay out detailed estimates of spending and revenue proposals.
- The Budget “assumes” that tax reform will be “deficit neutral,” which is dubious since Candidate Trump’s revenue proposals were scored by the nonpartisan Tax Policy Center (TPC) as costing more than $6 trillion in the first 10 years.
- Proposes lower individual rates, without any detail; Candidate Trump proposed to cut the top rate from 39.6% to 35%, with three brackets (10%, 25%, 35%), costing $1.5 trillion.
- Proposes to eliminate many deductions and credits, but retains the deductions for home-ownership, charitable giving, and retirement savings.
- Proposes to repeal the Alternative Minimum Tax for upper income taxpayers, scored by TPC as costing over $400 billion.
- Proposes to repeal the Obamacare 3.8 percent surcharge on capital gains and dividends, costing $145 billion.
- Proposes to reduce the tax rate on businesses, paid for in part by eliminating “special interest tax breaks” but provides no details.
- Proposes shifting to a “territorial tax system” where only domestic profits would be taxed while profits from offshore would be tax-free, unlike the current system where taxes on off-shore profits are deferred, but taxed when brought back to the U.S. The Budget proposes a “one-time repatriation tax on already accumulated overseas income,” but provides no further details. (Reduction of the corporate rate to 15% has been estimated by TPC to cost $2.4 trillion in the first 10 years and $3.5 trillion in the second 10 years.)
8. Budget Aims for “Jobs and Growth” but Infrastructure and other Initiatives are Unfunded
- Unfunded Infrastructure: A trillion-dollar infrastructure initiative could have been a major job-creator. Unfortunately, while claiming credit for $200 billion in FY 2018 outlays “related to” infrastructure, the Trump Budget fails to request any new federal budget authority for infrastructure within the severely reduced non-defense discretionary levels.
- Unfunded Parental Leave: The Budget claims to include a “fully paid-for proposal to provide six weeks of paid family leave to new mothers and fathers,” but provides no federal funding, instead proposing only to allow States to establish paid leave programs (which they can already do).
- Unfunded Student Loan Initiative: Claims to improve student loan programs, but provides no new federal funding to increase the number of young Americans who can enroll in higher education.
- Lost Jobs in the Health Care Sector: Jobs are likely to be lost due to the substantial reduction in Medicaid funding and the resulting closure of health sector facilities.
- Lost GDP due to Deportation of Immigrants: Proposes $1.5 billion for expanded detention, transportation, and removal of illegal immigrants which could lead to a reduction in GDP and jobs due to deportation’s impact on the agriculture, construction, hospitality and other industries. The impact of lost workers would add to the effects of an already shrinking workforce (due to the Boomer retirement).
9. Balanced Budget Claims based on Unrealistic Economics, Dubious Savings, Unfunded Tax Cuts, and Unlikely Budget Cuts
- Claims Balanced Budget in 10 Years: The Trump budget claims to balance the Federal Budget in 10 years. However, the Trump Budget’s claim to balance the Federal budget is based on unrealistic economics, dubious savings, unfunded initiatives and tax cuts, and unlikely budget cuts.
- Unrealistic Economic Claims: The Budget assumes that, in real (inflation-adjusted) terms, GDP growth will increase to an annual rate of 3.0 percent by 2021 and will remain at that level through 2027. By contrast, the nonpartisan Congressional Budget Office estimates that, in real terms, GDP will expand at an average annual pace of 2.1 percent from the fourth quarter of 2016 to the fourth quarter of 2018, and will expand at an average annual rate of 1.9 percent during the second half of the 10-year period. CBO will release in June or July a re-estimate of the President’s budget proposals using CBO’s consensus economic projections.
- Dubious Budget “Savings”: Budget assumes $775 billion in unspecified non-defense discretionary cuts ($119 billion in 2027 alone); and includes $139 billion in savings from “reducing improper payments.”
- Unfunded Tax Cuts: $5 trillion in tax cuts are not paid for.
- Unfunded Investments: The promised $1 trillion in infrastructure investment is supported by unspecified outlays of only $200 billion, while simultaneously cutting the Highway Trust Fund by $95 billion.
- Unlikely Cuts: The budget is replete with politically unrealistic program eliminations and cuts, including an overall reduction of non-defense discretionary programs by 30% over 10 years (before adjusting for inflation). Appropriations bills require 60 votes (bipartisan agreement) in the Senate.
- Key Procedural Point: the most important point to understand is that discretionary appropriations require 60 votes in the Senate, but entitlement and tax cuts can be advanced through the filibuster-proof Budget Reconciliation process and require only 50 votes in the Senate.
- Obamacare Repeal-and-Replace Must be Finished First: Before the GOP can use an FY 2018 Budget Reconciliation Bill to advance entitlement and tax cuts, the FY 2017 Reconciliation Bill — which is the vehicle for Obamacare repeal-and-replace legislation — must be completed or abandoned. Senate Republicans are currently miles away from developing a repeal-and-replace bill that can garner 50 votes in the Senate.
- October 1 Shutdown: The government will shut down on October 1 (the beginning of FY 2018) if Democrats and Republicans are at an impasse on defense and non-defense discretionary spending levels, unless a stop-gap continuing resolution is passed that maintains spending at current (FY 2017) levels.
- Another Bipartisan Budget Act? Democrats and moderate Republicans will press to resolve FY 2018 discretionary appropriations with a new Bipartisan Budget Act — similar to 2013 and 2015 — when the caps on defense and non-defense spending were raised by equal amounts. But it may take a lengthy shutdown, like October 2013, for the two sides to reach this point. President Trump and OMB Director Mulvaney have both indicated they would welcome a shutdown.
- Debt Ceiling: On March 15, 2017, the Statutory Limit on the Public Debt was automatically re-set at current debt levels (on that day) as prescribed by a previous law. Despite the new debt ceiling, Treasury can — for several months — meet legal requirements for redemption of bonds, payment of benefits, and payment of contractors by managing cash flow and dis-investing certain Federal trust funds. However, by late summer or early fall, Congress will have to raise the debt ceiling to avoid a U.S. default that would cause economic chaos. When a contentious budget debate is under way, raising the debt ceiling typically becomes part of the larger stand-off, posing a risk to financial stability. Link to Debt Ceiling Webpage.