It was recently announced that the federal government’s annual budget deficit is getting larger. In addition, the trade deficit is also growing. Does this mean that President Trump’s economic policies are not working?
In 2018, the annual budget deficit increased by more than 16 percent from 2017 to $779 billion. That means that the public debt, which is the accumulation of all deficits, increased to more than $22 trillion.
The Democrats quickly pounced on this news to criticize Trump for his failed economic policies, especially the tax cuts.
The Trump tax cut, however, did not add one dollar to the deficit. That’s because in fiscal year 2018, with the tax cut in effect, the Treasury collected slightly more revenue than in fiscal 2017.
The increase in the deficit was due to increased spending, mostly for the military. In fact the tax cut probably helped to keep the deficit down because it helped increase annual economic growth from 2 percent to about 3 percent.
The Congressional Budget Office (CBO) forecasts annual deficits will get even larger in the next few years. However, the CBO does not have a great record for forecasting deficits, so using its forecasts may yield inaccuracies.
The CBO does point out that reducing the deficit will be extremely difficult. That’s because more than 60 percent of government spending is for entitlements: Social Security, Medicare and Medicaid. Most politicians won’t even talk about cuts to those programs.
Add in defense spending and interest on the public debt, and that leaves less than $1 trillion for everything else. So cutting government spending will be difficult.
Raising tax rates in an attempt to reduce the deficit will also be difficult, and even if accomplished may not necessarily increase tax revenue. That’s because higher tax rates will likely slow economic growth, so there is less earned income to be taxed.
President Trump has already spent heavily on the military in his first two years, so perhaps some cutting can occur there. His plan is to try to hold spending constant and then allow the increased economic growth to increase tax revenue, which will reduce the deficit and perhaps even balance the budget.
Of course, the real long-term problem with the public debt is that there is no mechanism in place to ever pay any of it back. To finance the annual deficit, bonds are sold. Interest is paid annually on those bonds.
When the bonds mature and must be repaid, the government simply rolls over the debt by selling new bonds to pay for the matured bonds. The result is the public debt keeps growing.
The lack of any mechanism to repay the debt should be addressed by Congress.
Regarding the increase in the trade deficit, it is far too early to determine if Trump’s policies are working. In the short term — 2018 — the trade deficit did increase to a record-high level. But that doesn’t mean Trump’s policies are not working.
The trade deficit increased for a number of short-term reasons. For instance, once the tariffs were announced, companies increased their purchases, so they could buy before the tariffs took effect. That increased imports.
The strong dollar made U.S. exports more expensive for foreigners, so they bought less. It also meant that, even with tariffs, imports were relatively cheap. That worsened the trade deficit.
Trump’s trade policies are meant to be provide long-term solutions, even if there is some short-term pain. Already he has a new agreement with Mexico and Canada. But the agreement has not been approved by Congress, so it has not been enacted. Agreements with South Korea and Japan are being finalized but are not yet in effect.
China is finally at the bargaining table after decades of profiting from a trade deal that put the U.S. at a disadvantage. These negotiations are moving forward and, when complete, will open the China market to U.S. manufacturers. In the long run, this will reduce the trade deficit.
President Trump is working to solve the problems of the budget deficit and the trade deficit by seeking long-term solutions, even if there is some short-term pain.
This is very refreshing because past administrations were headed by career politicians who always seemed to kick the can down the road and let the next president solve the tough problems.
Given time, Trump’s policies will work.
Michael Busler, Ph.D. is a public policy analyst and a professor of finance and economics at Stockton University.