Three Main Takeaways from CBO’s Analysis of the President’s Budget

The Congressional Budget Office released its Analysis of the President’s FY2018 Budget last week, estimating that the plan would reduce the federal budget deficit from a projected 3.6 percent of GDP this fiscal year to 2.6 percent by FY2027. As CBO’s analysis notes, many of the Administration’s proposals were not sufficiently specified for CBO and the staff of the Joint Committee on Taxation (who prepared the revenue estimates of the tax proposals) to do their own analysis, so the agencies used the Administration’s estimates as placeholders. But CBO’s analysis reveals three major points about the President’s proposals.

The deficit won’t be zero in 2027

In the President's FY2018 Budget, the Administration estimated that the deficit would fall to zero by FY2027 (a surplus of 0.1 percent of GDP to be precise), as promised by the Trump Presidential campaign. But CBO estimates a deficit of $720 billion for that year.  If CBO and JCT used many of the Administration’s own estimates, then why did they project a deficit of $720 billion? It turns out that the Administration projects over $700 billion more revenue in that year than CBO (and $3.4 trillion more over the 2018-27 period) because of faster projected economic growth. It would be nice if that forecasted growth happens, but achieving 3 percent annual real growth in GDP as the Administration assumes may be quite difficult. CBO forecasts that the average annual growth rate of the economy will settle at 1.9 percent, consistent with forecasts by the Federal Reserve. 

Budget cuts will benefit the wealthy at the expense of low- and middle-income households

CBO estimates that the President’s budget would reduce the federal budget deficit by a not insignificant $3.3 trillion over the 2018-27 period.  This would come from about $4.2 trillion in spending cuts over the 10-year budget period offset by $900 billion in net tax cuts from repeal of the Affordable Care Act. The specific changes in the budget would favor the wealthy at the expense of other households. My colleagues at TPC and the Urban Institute Health Policy Center estimate that 70 percent of the tax cuts from repealing ACA taxes would go to households with income above $200,000, with nearly half to households with income above $1 million. While we don’t have distributional estimates for the spending cuts, $2.2 trillion would come from cuts in spending for health care, income security, and subsidies for student loans, many of which would target low- and middle-income households. Furthermore, while these cuts may improve the federal budget outlook, they could cause chaos in the states if the costs of supporting these programs are pushed down to them.

The budget offers no details about the Administration’s tax reform plan

The budget includes only a general description of the President’s plans for tax reform. While past White House budgets have included very detailed tax change proposals, this one assumes deficit-neutral tax reform but provides no specifics. CBO and JCT included the Administration’s estimate that tax reform would have no net effect on the budget, and did not try to estimate specific proposals or their effect on the economy. However, if a deficit-neutral tax plan includes the tax cuts outlined by the White House, other provisions would have to boost revenue a lot to pay for them. TPC estimates that tax cuts consistent with those outlined by the Administration in April could reduce federal revenues by as much as $7.8 trillion over the next decade. And even incorporating revenue raising items discussed by the Trump Administration or by the Presidential campaign cuts the cost only by a little more than half – to $3.5 trillion.

The President’s fiscal plan includes real proposals for deep cuts to domestic spending. But its unrealistic economic growth estimates and its unspecified tax plan help explain why the Administration likely will fall far short of its goal of balancing the budget in a decade.