The budget resolution that narrowly passed the House last week represents a significant victory for Republican Speaker Mike Johnson and for the president’s fiscal agenda. Whether it’s good for the country is another matter.
As it stands, the House budget plan would allow for up to $4.5 trillion in tax cuts over the next 10 years and calls for perhaps $2 trillion in spending reductions (specifics TBD). The bill now moves to the Senate, which wants even steeper tax cuts, and will be subject to further favor-trading, arm-twisting and (perhaps) the whims of the White House. Whatever legislation results from this process is, on current trends, likely to add trillions in new deficit spending.
As these talks continue, the crucial question — how much the government can prudently borrow — will barely be mentioned. In what’s now standard practice, Republicans aim to move their tax-and-spending package through the Senate using reconciliation, an arcane procedure that was once intended to help restrain fiscal excess but which has long been twisted to facilitate it. Serial abuse of this process has already delivered actual and prospective budget deficits of 6% of gross domestic product with steadily mounting debt, even with the economy at full employment.
The core of the Republican plan — which reconciliation would expedite by making it filibuster-proof — is the proposed extension of most of the Tax Cuts and Jobs Act of 2017, which was itself passed through reconciliation. Congress made the law comply with a rule forbidding higher borrowing beyond the 10-year planning window by scheduling most of its tax cuts to expire at the end of this year. Instead, they’ll almost certainly be extended. The new package will doubtless rely on the very same gimmickry — extend, expire, extend, repeat.
Not content with renewing the Tax Cuts and Jobs Act, the administration and its enablers have many other tax cuts in mind as well. The White House wants to cut the corporate tax rate to 15% from 21%, raise the $10,000 limit on the deduction for state and local taxes, and stop taxing tips and Social Security benefits. High tariffs (taxes by another name) could help to offset the cost of such changes, as the administration insists, but only by making the tax system as a whole much more regressive, burdensome and anti-growth.
In short, the current Republican majority, which talks a lot about controlling government spending, is on a path to do quite the opposite. Total debt held by the public is already on course to rise from $30 trillion this year to $52 trillion, or nearly 120% of GDP, by 2035. That’s assuming lawmakers let the Tax Cuts and Jobs Act expire as promised and no new economic setbacks arise between now and then. At the moment, Congress has more or less agreed that the best-case scenario will be much, much worse.
At some point, financial markets are going to say that enough is enough. The budget trajectory isn’t investors’ only concern: Geopolitical instability, steeply priced assets and challenges to the Federal Reserve’s operational independence are all in play. Borrowing costs might rise for any or all of these reasons, shifting the fiscal outlook from bad to irretrievable. Another round of this all-too-familiar Capitol Hill ritual will hardly help.
— The Bloomberg Opinion Editorial Board
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