Donald Trump once said that he would not only balance the budget but pay off all the debt. Of course that was utter nonsense but he did commit to eventually balancing the budget. His latest budget removes the pretense that it will ever happen. He calls for nearly a $1 trillion deficit next year.
We are in an era of a ballooning deficit. The recent tax cut will obviously decrease revenue. Some claim that the more taxes are cut, the more revenue increases due to economic growth. By that logic we could balance the budget by eliminating all taxes.
Meanwhile expenses are going up. Republicans traded increased defense spending for increases in Democrat backed programs. Of course nobody is doing anything about entitlements.
Some believe that the federal budget must be balanced like a household budget. There are a couple of problems with this comparison. Households have a deficit if a new car or house is purchased. More important, they don’t have the power to raise revenue through taxation.
There is no problem with a modest deficit. One economist stated that the economy can easily absorb one that is less than the increase in GDP. We would need 5% growth to cover next year’s deficit. That certainly won’t happen.
The problem gets worse over time. Entitlements will skyrocket due to the retirement of the baby boom generation. Then there is the interest. If we assume an interest rate of 2% on the $20 trillion current debt, that’s $400 billion. Let’s suppose that the debt in ten years is $30 trillion with a 6% interest rate. That works out to $1.8 trillion in interest. Obviously, something needs to be done. Those few in Washington sounding the alarm are being ignored.
Promising lower taxes and/or increased government benefits may be a great way to achieve electoral success. However, it’s a lousy way to govern.