Deficit in FY 2017 soared to $668 billion

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Published by: Dan Calabrese on Wednesday October 11th, 2017

Almost all because of increased spending . . . and slow growth.

I have often expressed alarm at the size of the national debt, which has now topped $20 trillion, and every year we run a deficit we add to it. You will hear Beltway types insist this isn't a crisis because "we owe it to ourselves" or "it's not that much as a percentage of GDP" or whatever.

Bolshevik.

It's an enormous crisis because it exists in bits and pieces we keep refinancing every few years, and we're keeping interest rates artificially low at the moment to hide the true costs of it - which is punishing people who save as part of the bargain. Even at that, the portion of the federal budget that goes to just paying interest on the debt is exploding, and will soon top $500 billion a year if it hasn't already.

We need to not only balance the budget but start running surpluses so we can retire principal and eventually pay the whole thing off. No entity can survive permanently when it perpetually spends more than it takes in and borrows to make up the difference, especially when it never pays back principal on the debt.

So people who are very concerned about deficits and debt are often labeled "deficit hawks," and such people typically oppose tax rate cuts because the static analysis types inside the Beltway think tax rate cuts increase deficits.

I know better. What increases deficits is two things: Slow GDP growth and excessive spending. And these are the very factors that we now know gave us a deficit of $668 billion in Fiscal Year 2017, which ended on September 30:

Federal outlays climbed by some $130 billion to $3.982 trillion. Three percent is probably more than most of our readers received in raises, but by federal standards it’s penurious. Some of the big outlays were, as ever, for the three giant entitlements—3% for Social Security, 4% for Medicare, and 2% for Medicaid as the pace of new enrollments slowed under the Affordable Care Act.

The biggest single spending increase was 45% for education thanks to an upward revision of $39 billion in the “estimated net subsidy costs of loans and loan guarantees issued in prior years.” In plainer English, the Obama Administration low-balled the costs of nationalizing student loans. Tens of thousands of borrowers are defaulting on their student debt, and the taxpayer tab is coming due.

But the main reason for the rising 2017 deficit was a mere 1% increase of $47 billion in federal revenues. Individual income taxes climbed a meager $39 billion, or 2.5%, while corporate taxes fell $3 billion, or 1%. This reflects the slow-growing U.S. economy, especially in the first half of fiscal 2017.

A typical economic expansion throws off 3% or more in additional revenue each year as wages and profits rise, and in the go-go 1980s and 1990s increases of 5% or more were common. It’s no coincidence that the federal budget deficit closed rapidly as a share of GDP during those expansions, even going into surplus in the 1990s, in contrast to the current expansion.

You'd never know it from listening to the political class, but federal revenues do not rise and fall commensurate to what happens with tax rates. They would have you believe that if tax rates decline 5 percent, revenue will decline 5 percent, and vice versa. That is simply not true. Federal revenue rises and falls with GDP growth. At any given time, federal revenue is almost always between 18 percent and 20 percent of GDP regardless of tax rates. What makes revenue go up or down is whether GDP is growing.

GDP did not grow substantially during the Obama Administration, averaging slightly less than 2.0 percent per year and never once cracking 3.0 percent. That's why we were running deficits of more than $1 trillion a year for the first half of the Obama presidency, and why even now we're struggling to get anywhere near a balanced budget. GDP has to grow, plain and simple. It's the only thing that can put us in a position to get our fiscal house in order.

By the way, the fact that we were running deficits of more than $1 trillion a year five years ago, and now the deficit is "only" $668 billion does not represent progress. Why? Because debt accumulates. If you have a $1 trillion deficit in Year 1 and a $10 deficit in Year 2, you're not better off at the end of Year 2. You're worse off, because you're $10 further in debt than you were at the end of Year 1. (Actually more because of interest, but I think you get the idea.)

We're only improving the situation when we're reducing debt, not when we're merely reducing deficits. You understand the difference, right? Reducing deficits means you're still piling on debt, just not as fast. Reducing debt means you're running a surplus and paying off principal. We haven't done that since end of the Clinton Administration.

By the way, we did it at the end of the Clinton Administration because Bill Clinton and Newt Gingrich made a deal to cut the capital gains tax and make a series of other changes to the tax code that helped unleash growth. Now, some of this growth was illusory because it was fueled in part by the DotCom boom, which turned to a bust before much longer. But the point is that it was growth, not higher tax rates, that fueled the increase in federal revenue. We need that kind of growth again, and no matter what the Congressional Budget Office says, cutting tax rates and simplifying the code is the best way to get there - with a reduction in the corporate tax rate being the most important imperative.

GDP growth for Obama's final year? A measly 1.6 percent

Here is where Senate budget rules present a very big problem. The Senate is bound by rules that pretty much assume tax rate cuts equal revenue cuts, even though that's objectively not true. And Senate rules don't allow the passage of budget measures that (they think) increase the deficit without 60 votes. It's basically impossible to get 60 votes in the Senate for any type of pro-growth measure, and it might not even be possible to get 50 votes because four of the Senate's 52 Republicans are not really Republicans at all. (Looking at you, Senators McCain, Collins, Murkowski and Paul.)

Without pro-growth tax policies, we're looking at the continuation of deficits like the one we just produced, or even worse, and that's only going to make the fiscal condition of the country more precarious than it already is - which is awfully precarious.

How do you solve the problem? You start by helping the public understand we're running deficits not because tax rates are too low, but because growth is too slow. That's the problem to solve. It would help if the Republican majority in the Senate would change the budget rules, and they could. But Mitch McConnell refuses to even try, which sort of makes you wonder if he wants real growth anymore than the four frauds listed above.

He says he does. But nothing he does backs that up.

Dan's new novel, BACKSTOP, is a story of spiritual warfare and baseball. Download it from Amazon here!