Vice President Mike Pence, in an interview with CNBC last week, defended the strategy of deficit expansion, saying the most important thing for the new Administration was “to restore growth” and “deficits and debt are right in line.”
Also, during the same interview, White House Director of the National Economic Council Mr. Larry Kudlow commented that, “CBO [Congressional Budget Office] is now saying that the tax cuts have paid for themselves”.
The economic and budget data do not support these statements or assertions by White House officials.
First, real GDP growth in 2019 was 2.3%, the same growth rate of 2017, the year before the tax cut was implemented. In other words, the tax cut did not lift growth in a sustained way as was suggested or promised, and if it wasn’t’ for the two additional spending bills for defense and discretionary domestic programs GDP growth in 2019 would have below that of 2017.
Second, it is hard to know what Vice President Pence meant when he said “deficits and debt are right in line”. Based on current projections the budget deficit will be over $ 1 trillion in 2020, up from $665 billion in 2017. Also, CBO estimates that the deficit will gradually increase to $1.5 trillion by 2029 (roughly the same percent 4.8% of GDP as in 2020), even with sustained economic growth, increasing the amount of outstanding federal debt relative to GDP to nearly 100%. In other words, current spending and tax laws are misaligned (not” right in line”) with the economy’s potential growth performance.
Third, the Congressional Budget Office (CBO) has never stated or can anyone infer from CBO reports that the tax cuts paid for themselves. The best check on the tax cut payback is look at how much revenue is being generated in relation to GDP before and after the implementation of the tax cut. In calendar year 2017 federal revenue collections stood at 17.6% of GDP and in 2019 the figure was 16.5%. In other words, the revenue shortfall of 110 basis points is the equivalent of more than $230 billion in less federal revenue.
Fourth, CBO projects that federal revenue will not reached the 2017 threshold of 17.6% until 2026--- after some of the business and individual tax cut provisions sunset. In other words, the tax cut never pays for itself, and America faces complex policy decisions in coming years.