Donald Trump's Balanced Budget Goal Rests on Questionable Math -- 2nd Update

By Nick Timiraos Features Dow Jones Newswires

President Donald Trump's proposal to balance the budget within 10 years includes some aggressive and potentially inconsistent economic assumptions and accounting devices.

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One example: The White House predicts economic growth will pick up speed in the coming years without much increase in either inflation or interest rates. That, in turn, is expected to boost revenue growth and reduce the need for social-safety-net spending. To achieve a fortuitous mix of fast growth and low inflation and interest rates, the economy would need to deliver a worker productivity boom that many other forecasters don't foresee.

This disconnect in economic views is evident by comparing White House interest-rate forecasts with those of others. Even with no significant acceleration in growth, the Federal Reserve projects short-term interest rates will rise to near 3% in 2019 from less than 1% now. The Trump administration sees short-term rates rising to just 2.1% during the same stretch.

Another example: The budget presented Tuesday would make big cuts to budgets for education and research and development, two areas that could help stimulate the kind of productivity growth that would boost the economy's growth rate without causing a rise in either inflation or interest rates. Research funding would be cut 25% next year at the Pentagon, 23% at the National Aeronautics and Space Administration and 20% at the National Institutes of Health.

"Economic policy is about tradeoffs. If you assume away the tradeoffs, it's like cheating," said Ernie Tedeschi, an economist at Evercore ISI, an investment research firm.

The budget proposal's focus on reduced deficits also sets up potential collisions with Mr. Trump's other policy preferences. For example, while he proposed a $200 billion boost in funding for public-private infrastructure investment, he simultaneously would cut $95 billion in funding for the federal Highway Trust Fund, the primary vehicle for maintaining the nation's roads and bridges, over the next decade.

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The budget also appears to double count the benefits of faster economic growth: Once to offset the effects of lower tax rates on government revenue and a second time to help close the budget deficit over time.

The administration is projecting the growth rate will pick up to 3% for much of the next decade, from near 2% for the past decade, in part because cuts in tax rates will stimulate more economic activity. In the past the White House has argued that such a growth pickup meant tax cuts could pay for themselves, enlarging the economic pie with the with the government getting a smaller share of a larger pie.

In his budget proposal Tuesday, Mr. Trump estimates his economic policies, including the tax plan, will be more than revenue neutral. The budget estimates it will generate an extra $2.1 trillion in revenue and help to balance the budget by 2027.

"The same money cannot be used twice," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a group that advocates for lower deficits.

A White House official said the budget doesn't double count the benefits of economic growth because it assumes the tax plan will cover its costs with other strategies, such as limiting tax deductions and closing loopholes.

Without any details of the tax plan to back up the White House's assurances, Democrats cried foul about the revenue estimates.

"No business in the country would even try to get away with this type of phony accounting," said Jason Furman, a senior fellow at the Peterson Institute for International Economics who until January served as President Barack Obama's top economist. "While one can debate how much of a boost to growth you get from tax cuts, there is no coherent argument for double counting the purported benefit of tax cuts."

He likened the budget accounting to a business selling ice-cream cones. Say the business starts out selling 100 ice-cream cones at $2 each, bringing in $200 in sales. Then the business calculates that cutting the price to $1.50 per cone would allow it to sell 33% more cones, or 133 cones. That would bring in nearly the same $200 in revenue. If accounted for as the budget does, Mr. Furman argued, it would show $266 in revenue -- or 133 cones at $2 each.

"This appears to be the most egregious accounting error in a Presidential budget in the nearly 40 years I have been tracking them," former Treasury Secretary Lawrence Summers, who served as an Obama administration economic adviser, said on Twitter.

Asked to respond to the critique on Tuesday, Treasury Secretary Steven Mnuchin said it was premature to judge the budget because the administration is "not far enough along to estimate what the impact will be."

Lawmakers won't be able to use Mr. Trump's numbers when they begin drafting their own budget plans next month. If growth instead remained at 2% with no uptick in unemployment, projected deficits would widen by $3.1 trillion over the coming decade, according to Mr. Trump's budget.

Mr. Trump's proposal "puts Congress in a box," said Ed Lorenzen, a budget analyst at the Committee for a Responsible Federal Budget. "The numbers in the budget would not add up if Congress passed a tax-reform bill consistent with the position" of a revenue neutral tax plan.

Richard Rubin

contributed to this article

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

May 23, 2017 19:02 ET (23:02 GMT)