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Flat Revenues And Increased Spending Boost Deficit To Highest Level In Six Years

It is ironic but not surprising that Republican deficit hawks preside over exploding debt.

The economy boomed in the three quarters that followed last year’s Republican tax reform, but economic news has become more mixed of late with a topsy-turvy stock market and Mr. Trump’s tariff war beginning to affect bottom lines and employment. Now comes more news about the deficit that should rankle any fiscal conservatives who remain in Congress or the country at large.

The fiscal year for the US government ended in September and the figures on the federal budget deficit are not good. In fact, even though the US economy is booming, the deficit is the largest deficit run by the government in six years. The deficit for the 2018 fiscal year was $779 billion, a 17 percent increase over the $666 billion deficit in fiscal 2017. The last time the deficit was higher was in 2012 when Barack Obama presided over a deficit of more than a trillion dollars.

The deficit is the difference between what the federal government spends and what it earns. When the federal government spends more than it receives in revenues, as it has every year since 1960 (with the exception of 1998), it must borrow the difference. Each annual deficit is added to the mountain of federal debt which currently stands at more than $21 trillion.

Democrats were quick to blame tax reform for the exploding deficit. A deficit of this magnitude in an economy this strong is historically unprecedented,” Jason Furman, chairman of the Council of Economic Advisers in the Democratic administration of President Obama and an economic policy professor at Harvard University, told the Wall Street Journal. “Undertaking permanent fiscal stimulus [through tax cuts] at this stage of the economic expansion is contrary to all sound tenets of economic policy.”

According to Treasury Department statistics, flat federal revenues were part of the deficit problem. Total federal receipts were $3.329 trillion in 2018 compared with $3.316 trillion in 2017. FY 2018 included three months — October, November and December 2017 — at higher tax rates. This means that the 2019 revenue picture looks even worse.

Under tax reform, withholding was lowered in February for individual taxpayers. Despite this, tax receipts from individuals increased by one percent. Tax payments by businesses fell more than 30 percent for the year, however.

Flat revenue was not the only contributor to the rising deficit. Federal spending also increased. Total outlays for 2018 were $4.108 trillion compared to $3.981 trillion in 2017. The spending increases were driven by rising interest costs paid on a greater amount of federal debt as well as increased military spending, which rose by six percent, and Social Security spending which increased by four percent.

Republicans argue that the tax reform is fueling economic growth, which will eventually lead to higher tax revenues. Nevertheless, Kevin Hassett, chairman of the Council of Economic Advisers, admits that spending and the deficit are big problems.

“The deficit is absolutely higher than anyone would like,” Hassett told Bloomberg last week. “As you watch our next budget come out — and you’ll start to see things in the next few weeks — then you’ll see a much more aggressive stance” on spending issues.

For the past half-century, the only combination that resulted in lower deficits was when a Republican Congress put the brakes on spending by a Democrat president. The much-maligned John Boehner led the Republican House to cut the deficit in real dollars between 2012 and 2015 thanks to the sequestration. Interestingly, once Republicans gained control of both houses of Congress in the 2014 elections, both spending and the deficit again started to climb. The same combination of Republican Congress and Democrat president yielded the last budget surplus in 1998.

It is perhaps ironic that the Republican deficit hawks would preside over a blowout in the deficit. It is unsurprising, however. Historically, the only thing the parties have been able to agree on is borrowing and spending at ever higher levels and the problem seems to get worse when one party controls both Congress and the White House.

Regardless of the outcome of the election, the deficit problem seems unlikely to change any time soon. Unless federal revenues can be increased or spending can be cut, the 2019 federal deficit is forecast to be on the wrong side of a trillion dollars once again.

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