Global| Mar 11 2019President's 2020 Budget: "Chaos" in the Numbers!!!
Summary
President Trump's 2020 budget proposal has many story lines, but the main story is the "chaos" in the numbers. Not only do the economic forecasts appear to be overly optimistic when compared to consensus estimates, they contradict two [...]
President Trump's 2020 budget proposal has many story lines, but the main story is the "chaos" in the numbers. Not only do the economic forecasts appear to be overly optimistic when compared to consensus estimates, they contradict two of the basic tenets of the Administration's fiscal strategy in that "tax cuts will produce faster growth" and "tax cuts will pay for themselves in the longer run."
At first glance, the 2020 budget does appear to adhere to the story line that tax cuts generate faster growth. After recording 2.9% growth in 2018, the Administration confidently predicts 3%, or a little better, until 2024 and then growth inching down to 2.9% in 2025 and 2.8% thereafter.
Yet, what is confusing about the economic forecasts is that the Administration is predicting as much growth in 2025 as what occurred in 2018, but last's year economic growth was boosted by business and individual tax cuts and in 2025 individual tax cuts expire and full expensing of business equipment had already expired in 2024.
So the question the Administration needs to answer, "Do tax cuts trigger faster growth, or don't they? " Their own economic forecasts contradict their main argument on tax cuts as they are forecasting as much growth when taxes rise as when they fall.
The other controversial issue is how the faster growth scenario generates more revenue growth. Again, here too the Administration's forecast on revenue runs counter to their basic premise. To be sure, in 2017, the year before tax cuts took effect, revenue as percent of GDP hit 17.4%. And according to the Administration's forecast that ratio of revenue to GDP is not reached again until 2024.
Yet, reaching that revenue threshold in 2024 is not because of economic growth, but instead it's due to a double-digit surge in corporate tax payments as the full expensing of business equipment expires. The ratio of revenue to GDP moves up even more so in 2025, jumping to 17.6%, as the tax rates on individuals reverse back to levels that existed in 2017.
So a fair read of the Administration's economic and budget forecasts is that tax cuts don't generate faster growth and tax increases lower the deficits. Confused? So am I.
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.
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