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Establishment Republicans Can No Longer Claim to Be Fiscal Conservatives

Ryan Bourne

So much for US Republicans starving the government beast.

When the party’s major tax reform package passed in December,
Democrats worried that projections for a $1 trillion debt increase
over a decade would be used by Republicans to justify spending cuts
and reforms to old-age entitlements.

Instead, with a looming government shutdown, Republican and
Democrat leaders last week conspired to pass a budget-cap busting
spending package. This increased outlays by around $300bn over two
years — a rise that no doubt will become the new baseline
thereafter.

People decry a lack of bipartisanship in the US, but Congress
has shown that when you get a cross-party consensus, taxpayers
suffer.

Under these plans, military spending would be raised by $80bn in
2018, and then $85bn in 2019. At Republicans’ request, the US
will have added around one-and-a-half times the UK defence budget
to its military spending its year.

Not only is the long-term
outlook unsustainable with untouchable entitlement growth, but the
country is now running up huge debts even in a strong and growing
economy.

And now we know what “working across the aisle”
really means — chucking money your opponents’ way.
Democrats pushed for matching increases in non-defence spending,
and eventually settled for an extra $63bn in 2018 and $68bn in
2019. This cross-party spending spree will result in a budget
deficit that Jeremy Corbyn would be proud of.

According to the Congressional Budget Office, the US was already
projected to run a deficit of 4.7 per cent in 2019 after the tax
cuts, up from 2.9 per cent in 2017.

Given reasonable economic assumptions, we are looking at the US
federal government now running deficits in excess of 5.6 per cent
of GDP, and then increasing further. All this comes, of course,
after a long period of sustained growth and with unemployment at a
16-year low of just 4.1 per cent.

This makes no economic sense from any school of thought.

In Keynesian terms, now is the time to fix the roof while the
sun is shining. Certainly, the deficit should be restrained to
levels necessary to get the debt-to-GDP ratio back on a downward
path.

With monetary policy tightening, unemployment low, and most
forecasters estimating that the US is already growing above
potential, there is no case for any kind of “fiscal
stimulus” today.

It is utterly irresponsible from a pure public finance
perspective too.

The country’s burgeoning entitlement spending, which is
driven by an ageing population, means debt is forecast to increase
exponentially from here to the future absent reform to those
programmes.

Even before the recent tax and spending changes, the
Congressional Budget Office thought debt held by the public would
rise from 78.7 per cent to 150 per cent by 2047. Facing these
headwinds with higher debt levels risks large future fiscal
consolidations being needed. At that stage, no doubt taxes will be
hiked, therefore reversing some of the pro-growth effects of the
recent tax reform.

Sadly, the Republican establishment has shown that they can no
longer claim to be fiscal conservatives. The revenue impacts of the
tax reform bill had a big enough effect on the debt. But arguably
net tax cuts were necessary to grease the wheels of pro-growth
reforms, such as cutting the corporate tax rate, and lowering
marginal income tax rates. Otherwise too many losers kick up a
fuss.

But in the long run, spending is the true burden of government
activity.

The Republicans should have been telling voters that if they
want to keep their tax cuts, there needs to be some fiscal
restraint.

Instead, they have now given up any pretence of caring about the
government debt burden.

We are therefore left with the bizarre spectacle of President
Trump having last year advocated for balancing the budget over 10
years, only for a Republican-controlled Congress to present him
with proposals that will blow up deficits to more than $1 trillion
per year.

Extrapolating this forward, the only feasible means of the US
getting on top of its terrifying debt outlook is to reform the
generosity and eligibility of entitlements, yet Trump has
effectively said this will not happen.

Congress can therefore form all the groups and task forces it
wants about how to deal with the long-term debt challenge. But the
truth is current politicians have conspired to put the US in a very
worrying position indeed.

Not only is the long-term outlook unsustainable with untouchable
entitlement growth, but the country is now running up huge debts
even in a strong and growing economy.

With a starting point of high debt levels and a political
equilibrium where agreement can only be found to raise spending
upwards, at the moment, it is difficult to see a way out.

Ryan Bourne
holds the R Evan Scharf Chair for the Public Understanding of
Economics at the Cato Institute.