Coming Soon: Another Step Toward $1 Trillion Deficits in FY2019

At some point, likely in January, Congress will pass funding for Fiscal Year 2019, fund the Children’s Health Insurance Program, provide additional disaster recovery funding, and increase defense and non-defense spending higher than present sequester caps would permit.

Whenever it occurs, lawmakers will discover that the sum of tax cuts and spending increases will virtually assure that federal deficits will reach $1 trillion in FY19—four full years earlier than the latest projection by the Congressional Budget Office (for comparison, the deficit in FY17 was about $666 billion, according to CBO). Americans can’t afford—literally and figuratively—to ignore the looming return of $1 trillion annual federal deficits and the waterfall of impacts they will create.

Americans can’t afford—literally and figuratively—to ignore the looming return of $1 trillion annual federal deficits and the waterfall of impacts they will create.

That deficit would virtually guarantee that gross federal public debt will reach more than its current 103 percent of Gross Domestic Product, the rough measure of all the output of America’s economy.

For the average American, the likely outcome of all this will be increased interest rates on car loans, mortgages, student loans, and credit card debt.

Economists have warned the developed countries about too much debt for the past three or four years. Now, central banks in Europe, Great Britain, and the United States are going to tighten monetary policy—that means higher interest rates. That’s why the prospect of an annual deficit of $1 trillion should get public attention and action.

Only in the immediate wake of the Great Recession have federal deficits hit $1 trillion annually. Worse, the FY19 deficit will occur while the longest peacetime economic recovery in America’s history winds down. If interest rates rise to their historical levels, Americans will soon discover that interest payments on the federal debt will be larger than the entire annual defense budget. These increased borrowing costs will inevitably fall on taxpayers. Deficits, like elections, have consequences.

CBO had forecast FY19 deficits of only $689 billion under current law. However, that projection came before, and therefore did not account for, disaster relief for storms and wildfires, and the newly passed tax cuts.

In our earlier posts, we assumed that total emergency funding for wildfires and hurricane damage in 2017 would reach $250 billion over the next few years.  Even if one forecasts no emergencies requiring federal aid in 2018 (an unreasonable assumption historically), the increasing size of federal funding for emergencies will begin to erode other parts of the federal budget.

I believe it unlikely that Congress will significantly reduce entitlement spending next year, despite House Speaker Paul Ryan’s assertion that he will make entitlement spending a high priority. Further, it seems improbable that the FY19 budget request from President Trump will urge significant reforms to the major federal entitlement programs—Social Security, Medicare, and Medicaid.

The combination of increasing spending, aversion to entitlement reform, and erosion of the tax base from the tax cut bill will force Congress to consider real changes to the Stafford Act through which much emergency spending occurs. Such changes will face serious legislative hurdles, and large emergency spending demands may in fact create perverse incentives that find the federal government assuming an even larger proportion of spending on emergencies.

Further, large increases in infrastructure spending seem remote with emergency spending consuming such large sums. What this means for the more than $3 trillion in presently unmet infrastructure needs, as well as any infrastructure program requested by President Trump in his budget request, is another year of poor roads, dangerous bridges, bad train tracks, and leaky water mains.

Some policymakers have advocated offsetting emergency funding by cuts in other spending. However, emergency monies have reached such large sums that only by seriously changing entitlements could such offsets occur. And, to repeat, Congress shows no appetite to undertake legislation of that kind in an election year.

In our view, Congress will soon see itself hemmed in as policy choices diminish because of rising deficits and subsequent crowding out of private investment. For example, the President’s promised defense buildup could be put in danger due to rising deficits and debt. As increasing deficits exacerbate congressional policy gridlock, Americans will begin to see where federal fiscal irresponsibility leads.

As increasing deficits exacerbate congressional policy gridlock, Americans will begin to see where federal fiscal irresponsibility leads.

Will Americans then demand Congress reform and protect Social Security and Medicare? I fear not. Just as in 1983, Congress will not act in a meaningful way to reduce deficits until faced by a real emergency in entitlement funding.