The U.S. House of Representatives just passed a budget bill covering fiscal 2020 and fiscal 2021. The deal calls for a $322 billion increase in spending over the next two years.
It will be necessary to have the Senate pass the bill and the president sign it before mid -September when the government would lose the authority to spend money.
That is a result of the public debt, the 800 pound gorilla, reaching its legal limit.
The public debt is growing because the federal government continues to spend more money than it receives in revenue.
This year the government deficit will exceed $900 billion. So why is the government spending even more?
Every year for the past 19 years and for 63 of the last 67 years, the irresponsible federal government has spent more than it received. To finance the shortfall government bonds were sold. Interest is paid annually on those bonds.
What happens when the bonds mature and the borrowed money must be repaid?
Since there is no mechanism in place to secure the funds to repay the bonds, the government simply sells new bonds to pay off the old bonds. The result of this rolling over is that the public debt, the total of all deficits, keeps growing.
The public debt is now $22 trillion. That’s about 10% more than annual GDP.
Interest on that debt is approaching $500 billion per year. As interest rates rise and the debt grows the annual interest expense will continue to increase. The spending in the new budget deal will increase the public debt by $322 billion.
Why will Trump agree to this?
Conservatives are shocked. The president is a businessperson and understands the pitfalls of too much debt. He also understands the problems associated with annual deficits and excessive spending. Yet he will agree to this budget deal. Since Trump always plays the long game, his approval of this budget may be explained by looking toward the future.
The president has a number of goals he is trying to reach regarding fiscal policy.
He wants to reduce the size of government and the amount government spends.
He wants to keep tax rates as low as possible.
He wants to balance the federal budget or at least reduce the deficit to a much smaller number.
Eventually he would like to reduce the public debt. And he wants to rebuild the military.
The GOP controlled Senate has similar goals. The problem is the House of Representatives who want to vastly increase spending on domestic programs, increase the size of government, raise taxes and not be too concerned about deficit spending.
Considering the current make-up, Trump is looking for the best deal possible, even though he said he would "never again" agree to a budget with a large deficit.
Trump knows that he must make a deal that will help him reach his goals and one that both houses of Congress will approve. The long term problem with reducing government spending is that more than 70% of the federal government budget is virtually untouchable.
More than 60% of government spending is for the entitlement programs: Social Security, Medicare and Medicaid. Politically it is nearly impossible to reduce spending on those programs. Any politician who suggests cuts in entitlements would never be elected to any office, although at some point spending on entitlements must be confronted. About 10% of the budget is spent on interest on the public debt.
That leaves about 28% of the budget where spending is somewhat discretionary. Roughly half of that is for defense and half is for all other domestic programs. Since the President wants to spend more to rebuild the military, he had to agree to spend more on domestic programs in order to have the Democrats in the House approve the spending bill.
Trump reasoned that he wanted to get through the 2020 election.
He hopes that he will be re-elected and the GOP can gain control of the House of Representatives and increase their majority in the Senate.
Once that happens, Trump can move to reach the other goals of reducing spending, reducing or eliminating deficits and eventually reducing the public debt.
He wants to do this while keeping tax rates low.
He also knows that to reach those goals, spending on the entitlement programs will have to be contained. While there are no painless ways to do that, the best alternative will likely be to raise the retirement age to 70 or 72 or even 75. Since people are living well into there 80’s and 90’s, this should be politically possible. He must emphasize that changes do not effect current retirees or those within a few years of retirement.
The budget deal may be the best alternative that can be achieved at this time. Even though the deal goes against basic conservative principles, it is the short term solution that may allow Trump to reach his long term goals.
Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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