Belfast Telegraph

Trump's $19bn weekly deficit is stirring up future trouble

The United States president's policies may be effectively booby-trapping their economy, writes Richard Curran

Donald Trump, with wife Melania
Donald Trump, with wife Melania
An anti-Trump protester
Donald Trump

By Richard Curran

US president Donald Trump is battling criticism in the wake of the mass killings in El Paso and Dayton, Ohio. His charged rhetoric over many months has brought criticism that he has 'inspired killers'.

On the economic front, he continues to wage a trade war with the world's second biggest economy. When it comes to foreign policy, he has pulled the US out of a nuclear proliferation treaty, while the tension ratchets up with Iran.

His every tweet on matters of immigration or race receives enormous media coverage all over the world - as it should.

But when it comes to the US economy's performance, there is a lot less coverage, at least on this side of the Atlantic. The headline economic figures actually look good when taken in isolation.

The stock market has enjoyed a massive bull run. Job numbers have grown for 106 consecutive months, the longest streak on record. The unemployment rate has been 4% or lower for 16 consecutive months - the longest run in 50 years.

Trump has no qualms about attributing all of this short-term economic success to himself.

"This is the greatest economy we have had in the history of our country," he recently bragged on Twitter. Irrespective of how much of that jobs and stock market record is down to Trump and his administration, there is certainly one thing which can be placed firmly at his door.

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That is the massive $1.5trn in tax cuts he announced in December 2017.

The package saw a cut in the corporate tax rate on future profits from 35% to 21%, which he said would help bring back around $4trn of cash and profits held by US multinationals around the world. He also offered US multinationals a discounted 15.5% rate on the repatriation of existing deposits banked overseas. That latter move did spur a sizeable shift of cash back to the US.

Mr Trump's administration said the tax cuts would dent exchequer revenues in the short term, but quickly they would pay for themselves through economic growth, which leads to more people working, which leads to more taxes being paid.

He envisaged trillions coming home, which would be invested back into businesses. That hasn't really happened.

Initially, a few hundred billion dollars returned to the US at the lower tax rate. In fact, American multinationals pay US tax on foreign profits now whether they bring the money home or not.

Around $50bn has gone from Ireland. But it hasn't affected the Republic's foreign investment flow and its corporation tax receipts have gone up.

The simple fact is that many are choosing to leave a lot of their foreign earnings abroad. The tax cuts have shot a hole in Trump's exchequer finances. Increased spending on the military and other federal programmes, combined with a massive drop in corporate tax receipts, is pushing the US into new territory when it comes to its national debt.

Corporate tax revenues are falling, despite the economic boom, and firms now pay the lowest share of taxes since the Eisenhower administration of the 1950s.

The Trump administration has said it will run up a budget deficit of $1trn this year. A similar figure is expected for next year.

Think about that figure. It represents the US government spending $19.2bn more every week than it takes in.

National debt in the US is running at $22trn, up $2trn since Trump became president.

This has to be put in context. He is not the first US president to introduce tax cuts. Ronald Reagan famously did so in 1981 and George W Bush twice brought in tax cuts.

Equally, there is the question of the affordability of the debt. Republicans increasingly suggest that massive deficits don't really matter. Once they are 'manageable', then they are fine.

How manageable are these deficits? Trump's chief economic adviser Larry Kudlow summed up the administration's thinking recently when he said: "I don't see this as a huge problem right now at all."

Right now are the key words there. It is a way of saying it will be someone else's problem later.

Government debt held by the public is expected to rise to 85% of gross domestic product (GDP) in a few years, which would be its highest level since 1947. It would be on course to reach 4.6% of GDP in 2023, assuming optimistic growth and no major military conflict.

There is a kind of naïve assumption that just because the cost of borrowing is relatively low now, this situation will continue into the future.

Some commentators have even suggested the Trump deficit is not a story of saddling future generations with a huge interest burden because rates are low now.

The interest rate on 10-year treasury bonds is running at around 2%.

Back in the 1990s, when the government was running budget surpluses, the 10-year rate was over 5%.

Defenders of the state of play also point out that the high deficits are not leading to inflation. The interest burden is currently running at around 1.5% of GDP, while it was over 3% in the mid-1990s.

When it comes to funding state debt, surely the key figure is the amount of money the state takes in from economic activity, rather than the level of economic activity itself.

And Trump has ensured exchequer receipts are not keeping pace with GDP growth, while spending continues to be ramped up.

Trump said during his election campaign that he would do away with deficits and even wipe out the national debt within eight years.

It has increased by $2,000bn since he took over. But before laying all of the blame at the president's door, the wider party political system will have questions to answer when eventually this has to be clawed back in years to come.

All Trump has done on the economic front is provide an exchequer-funded economic stimulus through his tax cuts. Barack Obama was prevented by the Republicans from doing so during his tenure.

Yet he ended up running big deficits, through higher spending, to steer the economy through the financial crash. The country was in deep crisis.

Trump's administration is increasing spending, cutting taxes and racking up ever-bigger budget deficits during an economic boom, not a crisis.

The Republicans were traditionally seen as more hawkish and anti-deficit. Yet they are backing the president's spending programmes, which can only be paid for with higher public debt.

Everyone expected that when the Democrats got control of the House, they would rein in the president's desire to spend more on the military. But they have done a deal with the Republicans which allows for military spending to hit near-historic highs next year.

Under the bipartisan deal, the Trump administration will spend $733bn per year on the military.

This comes at a time when Trump has said he is withdrawing from various fields of operation.

The money is supposed to go on next-generation technology, space, missiles and cyber capabilities.

In return, the Democrats secured increased spending on social and health service programmes. They both got something they wanted, but the deficit keeps going up.

Where is the worry in all of this? The United States will never run into a debt crisis because it will always be able to borrow money? Right? Perhaps this may be true.

Perhaps there is a new fiscal model based on the end of inflation, eternal low interest rates and permanent economic growth? I don't think so.

This looks like a presidency and a political system that is focused on the short term; that is booby-trapping the economy and the exchequer for a real financial hit further down the road.

Even if countries like the US never have to pay back their debt, because they can keep refinancing, they must begin to move towards running a surplus at some point in the future.

That will be painful for Americans. If it hurts Americans, it will hurt us all.

The scale of the clawback further down the road is enormous, given that during the good times, they are spending nearly $20bn per week more than they are taking in.

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