Trump proposes a new approach to the broken budget process

President Trump's 2021 fiscal year budget proposal has created yet another firestorm of controversy.

The proposal calls for a decrease in non-defense discretionary spending of 2 percent annually over the next decade and an increase in defense spending of 1.3 percent per year.  This will set off another battle in Congress between Democrats, who support increased non-defense spending, and Republicans, who, generally speaking, want more defense spending.

The likely outcome of this battle in Congress will be a so-called "compromise" similar to this year's budget resolution that boosted non-defense and defense spending above what the president proposed.

What is unique in the 2021 budget proposal is that Trump is the first president to call for a rules-based fiscal policy.  This is not just a proposal to restore budget process rules, such as discretionary spending caps and PAYGO — rules that Congress suspended in recent years.  Trump proposed new spending rules that are similar to the fiscal rules used in other countries, including Switzerland, Sweden, and Germany.  The purpose of these rules is to balance the budget in the near term and reduce debt to sustainable levels in the long run.  With the new fiscal rules in place, those countries were able to respond to the financial crisis without a U.S.-like debt blowout.

The president also proposed a wide range of reforms in entitlement programs, as well as discretionary spending programs required to achieve these goals.

Critics argue that Trump's budget proposal is not realistic because it assumes higher rates of economic growth than projected in other long-term forecasts.  Even The Wall Street Journal referred to many of the president's proposed fiscal reforms as aspirational goals that will never see the light of day in Congress.

The Trump administration should be given credit for recognizing that the budget process is broken and that current fiscal policies are not sustainable in the long run.  Without fiscal reform, the federal government will incur trillion-dollar deficits and increase debt to more than 150 percent of national income in coming decades.  The United States has emerged as one of the most heavily indebted countries in the world.  Countries in southern Europe with comparable debt burdens have become insolvent and unable to pay their bills.

If the United States continues to accumulate debt at the rate projected under current law, it will begin to look like Japan, the most highly indebted country in the world.  In Japan, higher debt burdens have, in fact, resulted in retardation and stagnation in economic growth.  These fiscal policies violate the "law of holes": if you find yourself in a hole, stop digging.  

In our research, we project that with effective fiscal rules in place, a downsizing of federal spending as a share of national income, combined with lower tax rates, would significantly boost the rate of economic growth in the long term.  With rules-based fiscal policies, the United States could balance the budget and reduce debt to sustainable levels, just as other countries have.

On the other hand, we project that under current law, higher levels of federal spending and increased debt will be accompanied by retardation and stagnation in economic growth in the long term, just as they have in Japan.  We question whether the United States now has the fiscal space available to respond to a fiscal shock, such as the financial crisis.  (By "fiscal space," we mean the ability to pursue countercyclical fiscal policy without triggering a debt crisis.)

If the United States is to avoid sliding into a Japan-like economic downturn, Congress should take seriously President Trump's proposal for a rules-based fiscal policy.  With such a policy in place, the United States would finally have an actual budget, rather than just a spending plan for elected officials.  

John Merrifield (think@heartland.org) is professor of economics at the University of Texas-San Antonio.  Barry Poulson is emeritus professor of economics at the University of Colorado-Boulder.

Photo illustration by Monica Showalter with use of White House image.

President Trump's 2021 fiscal year budget proposal has created yet another firestorm of controversy.

The proposal calls for a decrease in non-defense discretionary spending of 2 percent annually over the next decade and an increase in defense spending of 1.3 percent per year.  This will set off another battle in Congress between Democrats, who support increased non-defense spending, and Republicans, who, generally speaking, want more defense spending.

The likely outcome of this battle in Congress will be a so-called "compromise" similar to this year's budget resolution that boosted non-defense and defense spending above what the president proposed.

What is unique in the 2021 budget proposal is that Trump is the first president to call for a rules-based fiscal policy.  This is not just a proposal to restore budget process rules, such as discretionary spending caps and PAYGO — rules that Congress suspended in recent years.  Trump proposed new spending rules that are similar to the fiscal rules used in other countries, including Switzerland, Sweden, and Germany.  The purpose of these rules is to balance the budget in the near term and reduce debt to sustainable levels in the long run.  With the new fiscal rules in place, those countries were able to respond to the financial crisis without a U.S.-like debt blowout.

The president also proposed a wide range of reforms in entitlement programs, as well as discretionary spending programs required to achieve these goals.

Critics argue that Trump's budget proposal is not realistic because it assumes higher rates of economic growth than projected in other long-term forecasts.  Even The Wall Street Journal referred to many of the president's proposed fiscal reforms as aspirational goals that will never see the light of day in Congress.

The Trump administration should be given credit for recognizing that the budget process is broken and that current fiscal policies are not sustainable in the long run.  Without fiscal reform, the federal government will incur trillion-dollar deficits and increase debt to more than 150 percent of national income in coming decades.  The United States has emerged as one of the most heavily indebted countries in the world.  Countries in southern Europe with comparable debt burdens have become insolvent and unable to pay their bills.

If the United States continues to accumulate debt at the rate projected under current law, it will begin to look like Japan, the most highly indebted country in the world.  In Japan, higher debt burdens have, in fact, resulted in retardation and stagnation in economic growth.  These fiscal policies violate the "law of holes": if you find yourself in a hole, stop digging.  

In our research, we project that with effective fiscal rules in place, a downsizing of federal spending as a share of national income, combined with lower tax rates, would significantly boost the rate of economic growth in the long term.  With rules-based fiscal policies, the United States could balance the budget and reduce debt to sustainable levels, just as other countries have.

On the other hand, we project that under current law, higher levels of federal spending and increased debt will be accompanied by retardation and stagnation in economic growth in the long term, just as they have in Japan.  We question whether the United States now has the fiscal space available to respond to a fiscal shock, such as the financial crisis.  (By "fiscal space," we mean the ability to pursue countercyclical fiscal policy without triggering a debt crisis.)

If the United States is to avoid sliding into a Japan-like economic downturn, Congress should take seriously President Trump's proposal for a rules-based fiscal policy.  With such a policy in place, the United States would finally have an actual budget, rather than just a spending plan for elected officials.  

John Merrifield (think@heartland.org) is professor of economics at the University of Texas-San Antonio.  Barry Poulson is emeritus professor of economics at the University of Colorado-Boulder.

Photo illustration by Monica Showalter with use of White House image.