Is the optimism of Republicans concerning the federal budget recovery realistic?
After relentlessly campaigning about climate change and his suppositions on it, Trump’s EPA budget cut did not come as a surprise. Trump has just begun to fulfill his campaign promises, after directing a control of justification of regulations. He promises a rosy budget, with promises for better times, but many remain apprehensive about the real effects of upcoming moves.
In other moves, the Trump administration plans to increase military spending, to direct $1 trillion in infrastructure over 10 years and to drastically cut taxes. The result would be a fall in the deficit until 2019, when will start to rise again, and in 2027 would reach around $10 trillion, or around 5 percent of the economy. However, although the deficit is helpful in the recession, in an economy like the US (now), it may be more prudent to keep it as low or below 3 percent of the economy, else, it would be an invitation to another financial crisis; especially if the prediction that economic growth would be just 1.9 percent, could come true.
If the administration cuts taxes and in addition decreases federal spending, it could bring in the desired effects. Because of reduced taxes, economic growth would be accelerated and new jobs would be created, especially with increased public spending in infrastructure. Trump claims that the tax cuts combined with investment in infrastructure will certainly increase the economic growth rate above 4 percent and reduce the deficit.
Since Social Security and Medicare are two major causes of the federal deficit, many expect that Trump would cut them too, although he has promised otherwise. The savings through this cut would be $900 million in 2017. Therefore, he would certainly replace Obamacare with a new program, which will eliminate around $2 trillion in new spending. However, the new proposal may not be so generous to poor and sick, but rather predisposed to the rich and healthier people.
One more path where Trump plans to go is the reduction of tariffs, which could lead to economic growth too. Manufacturers from the US who import raw materials for production would decrease costs in this way, which would decline their prices, making imports cheaper along the way. The overall effect would be higher consumption caused by raised domestic purchasing power because of lower prices. That would mean increased production and higher economic growth, in the medium term.
However, this entire scenario is very stretched. If the administration fails to impose a large cut in public spending, America’s deficit will increase much more over the next decade. A huge budget deficit could adversely affect national debt, because of increase in tax cuts, and the subsequent increase in interest rates. This would neutralize the economic benefits and would lead to economic stagnation or a decline. This would further decrease savings and raise borrowing costs in the private sector, which would finally slow down or decrease economic growth. It is predicted that a cumulative budget deficit of $9.4 trillion between 2017 and 2026 would increase the total national debt to around $30 trillion. Since this would be 89 percent of gross domestic product in 2027, investments could be jeopardized if investors lose the will to finance such huge public debt, which would again, decrease economic growth.
Therefore, this scenario of rosy budget and economic renewal of the United States is only possible with the proper combination of tax cuts, decreased public spending and increased investment that would boost economic growth and neutralize the public debt and deficit. Capabilities to this affect are at a test now.