There are so many dysfunctional policies being implemented in the US at the moment that the continuing destruction of America’s fiscal position goes almost unnoticed. The fact that this recklessness is taking place under Republican control of the White House and both houses of Congress shows that any claim the party might once have had as a guardian of budgetary probity lies decades in the past.
Donald Trump, as part of his positioning as a more interventionist, populist president, came to power promising big spending on infrastructure. In the event, he and Congress came up with a familiar package focusing rather on tax cuts that largely benefit the rich.
Along with carelessness about the country’s long-term fiscal health, the president this week showed another familiar Republican behaviour of recent years: a willingness to play dangerous games of brinkmanship. He threatened to close down the federal government if Congress declined to fund his Mexican border wall.
The size of the tax cut carries risks in both the short and long run. A fiscal boost at the time the US economy is already growing healthily is always likely to boost spending on imports and push up the dollar through higher interest rates. That runs directly counter to Mr Trump’s obsession with reducing the trade deficit.
In the longer term, the cut will further denude the US government of revenues at a time when an ageing population is pushing up the cost of Social Security and Medicare. The Congressional Budget Office says the federal budget deficit over the next 10 years will average nearly 5 per cent of gross domestic product, compared with 3.5 per cent in 2017. Federal debt will rise to equal nearly 100 per cent of GDP, its highest since just after the second world war.
The Republicans’ profligacy is rash and partisan. Under Barack Obama’s presidency, the Republican Congress, pleading the need to return the country to solvency, pushed the US to the brink of default by creating dramas out of routine operations such as increasing the debt ceiling. This was sharply at odds with their willingness under the previous president, George W Bush, to support a huge unfunded spending commitment in the form of an expensive prescription drug benefit under Medicare, in addition to more tax cuts.
For some time now, a broad pattern has been clear. A Republican Congress or Republican president — Ronald Reagan, George W Bush — worsens the long-term US fiscal position before Democrats are elected and repair it. Even when the US desperately needed fiscal stimulus after the global financial crisis, Mr Obama gave it only a timely, temporary boost and later constrained spending growth.
There is almost no sign of similar responsibility being taken on the Republican side. The departing Speaker of the House, Paul Ryan, is frequently touted as a fiscal policy wonk with a commitment to balanced budgets. He is not. Mr Ryan’s plans for combining tax cuts with control of the deficit only ever added up with unrealistic assumptions about the growth rates that would be unleashed by lower taxes, plus unspecified and improbable spending cuts.
As in the past, the US will most likely have to wait for a Democratic president or Congress — or probably both — to return America’s finances to order. True, there is no immediate sign of fiscal crisis. The US government, despite its efforts to the contrary, remains a creditor in good standing. But the ability to get easily into debt does not remove the need for painful consolidation in decades to come.
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