The US budget deficit has increased to six-year high of $779 billion at the end of President Trump’s first full fiscal year in the White House, primarily due to continued borrowing. The United States federal budget is a representation of the financial image of the priorities of the government …
The US budget deficit has increased to six-year high of $779 billion at the end of President Trump’s first full fiscal year in the White House, primarily due to continued borrowing.
Background
The United States federal budget is a representation of the financial image of the priorities of the government and hence comprises the expenditure and revenue of the federal government. The federal budget allocation is primarily on healthcare, retirement, and defence programs.
The U.S. Treasury divides all federal spending into three groups: mandatory spending, discretionary spending and interest on the debt. Mandatory and discretionary spending accounts for more than 90 per cent of all federal spending and pays for all of the government services and programs. Mandatory spending is spending that Congress legislates outside of the annual appropriations process, usually less than once a year. It is dominated by the well-known earned-benefit programs Social Security and Medicare. On the other hand, Discretionary spending refers to the portion of the budget that is decided by Congress through the annual appropriations process each year. By far, the biggest category of discretionary spending is spending on the Pentagon and related military programs. Finally, the interest on the national debt is how much the federal government must pay on outstanding public debt each year.
Since 1901, including the government, estimates extending through 2019, the federal budget is 75 per cent of the time a deficit and only 25 per cent of the time a surplus. Earlier deficits were related to the rise of war expenses, or to receipt crunches caused by economic downturns or depression. The 1861-1865 Civil war, the 1898 Spanish war, the 1899-1902 Philippine war, combined with the 1890 depression, account for the deficit of about $1 billion accumulated in the years 1850-1900. World War I brought back large deficits, reaching $23.2 billion for the period 1917-1919. After that budgets showed surpluses for 11 consecutive years. However, the Great Depression followed by World War II resulted in a long, unbroken thread of deficits that were historically unprecedented in magnitude, attaining $216 billion for the period 1931-1946.
The 2018 federal budget was named ‘America First: A Budget Blueprint to Make America Great Again.’ The federal budget deficit was $665 billion in FY2017, versus $585 billion in 2016, an increase of $80 billion or 14 per cent. The budget deficit was 3.5 per cent GDP in 2017, versus 3.2 per cent GDP also in 2016.
Analysis
The US budget deficit has widened to a six-year high of $779 billion during President Trump’s first full fiscal year. Spending climbed its highest in the 2018 fiscal year. According to a statement made from the Treasury Secretary Steven Mnuchin and Office of Management and Budget Director Mick Mulvaney, the deficit increased by $113 billion or 17 per cent higher than the previous fiscal period.
The spike in the deficit is attributed to the increased defence spending, in Medicaid, Social Security and disaster relief. Federal revenue, on the other hand, rose slightly, by $14 billion after Republicans chopped tax rates for corporations and most individuals. Outlays climbed by $127 billion, or 3.2 per cent.
Mick Mulvaney, the director of the OMB, said the deficit was being aggravated by a “continual unwillingness” on the part of Congress to restrain spending. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said that the recent tax cuts and the increase in spending are making a bad problem worse. She added that “in as soon as a year, they will top $1tn and never come back down unless Congress acts.”
Following President Trump’s tax cuts, the cost of financing the deficit has increased with interest charged on the 10-year U.S. Treasury note is rising to roughly 3.15 per cent from 2.46 per cent at the start of the calendar year.
William Gale, a senior fellow at the Brookings Institution, said that “By cutting taxes in 2017 when the economy was already quite strong, Congress and the administration not only missed a golden opportunity to begin to address the fiscal problem, they actually made the problem worse.”
The Trump administration’s mid-session budget review predicted that 2019 deficit will hit $1.09 trillion and will total $1.08 trillion in 2020 and $1.01 trillion in 2021 before once again dipping slightly below the $1 trillion marks in 2021 with a projected deficit of $952 billion.
Counterpoint
In a statement, Budget Director Mick Mulvaney claimed that “America’s booming economy will create increased government revenues,” a point the GOP has repeatedly argued in favour of its tax plan. However, he added that “Going forward, President Trump and this Administration will continue to work with Congress to make the difficult choices needed to bring fiscal restraint, which, when matched with increasing revenue, will reduce our deficit.”
Assessment
Our assessment is that a deficit in the economy is evident; however, the US is depending on ensuring a positive growth in the economy to reduce the fiscal deficit despite an increase in government spending.
Leave a Reply