There are social conservatives – Trump won them over by promising to appoint conservtive Supreme Court justices. There are national security conservatives – Trump won them over by promising to greatly expand the military budget, to secure the border, and to defeat “radical Islamic terrorism”. That leaves the fiscal conservatives – which will be at the center of discussion for the rest of the year, as “thinking big” runs into financial reality.
– The federal debt is approaching $20 trillion, about 105 % of Gross Domestic Product. This is up from $5.7 trillion at the start of George W Bush’s first term and $10.6 trillion at the start of Barack Obama’s first term. The states are generally constitutionally required to balance their budgets, but Washington has learned that it can increase spending and lower taxes by pushing off payment to our grandchildren.
– The real test for fiscal conservatives is the the amount of tax revenue and spending relative to GDP. Long range they have been about 18.1% revenue and 20.7% spending, resulting in a deficit of 2.6% of GDP – which can be absorbed by a growing economy. Due largely to several years of the Republican-induced sequester, spending is currently at the 20.7% average, but revenue is at 17.6% for a deficit of 3.1%. More revenue is needed.
– Paul Ryan has spent a career developing proposals to move toward a balanced budget, and is willing to take on sacred cows like Social Security and Medicare. Trump’s Office of Management and Budget Director, Representative Mick Mulvaney of South Carolina, a strong deficit hawk, was a leader of the Freedom Caucus. That voice will be heard.
– Trump, the real estate developer, has many big ideas with the potential to blow up the budget: corporate tax cuts; individual tax cuts; a trillion dollar “public/private” infrastructure program; replacement of Obamacare; a 10 per cent ($54 billion per year) Defense Department spending increase; a new childcare entitlement; a border wall.
– The budget has been in something of a sequester straightjacket since 2011 when House Republicans used debt ceiling caps to force the creation of a Congressional Deficit Reduction Committee whose failure to reach any agreement triggered automatic budget reductions split evenly between defense and non-defense categories. (The anticipation had been that the risk of such a calamity would force concessions. It didn’t.)
– Generally, bills require a simple majority in the House (where the Republicans have a 239 to 193 advantage), and 60 votes to overcome a filibuster in the Senate (where they have a 52 to 48 advantage). Budget bills, however, can be passed with 51 votes under a set of arcane, but important, Reconciliation rules. Paul Ryan has general control of the House, but has to deal with the remaining 30 members of the Freedom Caucus; Mitch McConnell has to deal with a few Republican free agents (John McCain; Lindsey Graham; Susan Collins; Lisa Murkowski), while peeling off a few of the 10 Democratic senators who are running in 2018 from states carried heavily by Donald Trump. (51 is pretty safe; 60 is a heavy lift.)
Success will require cooperation among the Republicans who know that they must deliver after eight years of complaining about Obama, Pelosi, and Reid. It will also require expert timing and sequencing as well as content and salesmanship. Some predictions:
– Repeal and replace Obamacare will come first. Secretary of Health and Human Services Tom Price is an expert on the substance of heaalthcare and the politics of the House. Content will include an ability to tailor coverage to the individual’s needs, Health Savings Accounts, tax credits, buying insurance across state lines, a phase in period, and an expansion of Medicaid. The latter is necessary to prevent the major Democratic talking point – a significant loss of coverage. It will cost money, but it will be “repeal and replace” with a private sector solution, delivering on the Republicans’ first political obligation.
– White House guidance to federal agencies for the budget for Fiscal Year 2018, beginning October 1, includes a $54 billion increase in defense spending, an offsetting reduction for non-defense departments, and no changes to Medicare and Social Security. Thus begins the battle with Congress and the lobbyists. Lots of oxen will be gored. The “small government” Freedom Caucus will get its pound of flesh, but Defense will drive the total up.
– The administration has promised tax reform to be decided upon by August – an aggressive timeline. There will likely be a revenue-increasing border adjustment tax (similar to what is imposed by countries with Value Added Taxes), reduced rates, reduced exemptions, repatriation of corporate profits held offshore, and a “revenue neutral” outcome. Rate cutters will rely on “dynamic scoring” and the “Laffer curve” – the dubious premise that reduced rates will lead to increased economic activity and greater revenue in the long run. There will be lots of references by both sides to Ronald Reagan who reduced tax rates significantly in 1981 and 1986, but broadened the tax base, eliminating many deductions and increasing Social Security taxes.
Replacing Obamacare is an imperative, even if it has a cost. Increasing military spending is an imperative, even at a significant cost. It would be good to adjust Social Security and Medicare, but that can wait. Reducing the rest of governmnet is an opportunity, but not nearly enough to offset the military increase. By the time Congress gets to taxes, they will need to prioritize – and the bouquet will go to those that stimulate the economy and create jobs – not individuals.