Trump Aims to Balance Budget With Deep Cuts, Bullish Growth Projections

President Donald Trump next week will propose the U.S. can balance the federal budget over 10 years with substantial cuts to safety-net programs such as food stamps and other anti-poverty efforts, combined with a tax and regulatory overhaul that speeds up the nation's economic growth rate, a senior White House budget official said.

The president's budget, due for release Tuesday, will spare the two largest drivers of future spending -- Medicare and Social Security -- leaving trillions in cuts from other programs. That includes discretionary spending cuts to education, housing, environment programs and foreign aid already laid out by the administration, in addition to new proposed reductions to nondiscretionary spending like food stamps, Medicaid and federal employee-benefit programs.

The budget release, which will be unveiled while Mr. Trump is visiting Europe and the Middle East, shows how his economic policy team is trying to forge ahead on his agenda even as distracting political controversies, such as the recent firing of FBI director James Comey, swirl around Washington.

On Thursday, Treasury Secretary Steven Mnuchin testified on Capitol Hill, his first such appearance since his February confirmation, where he expressed confidence Congress could advance a revamp of the tax code this year. House Republicans held their first hearing on the proposed tax overhaul, following a series of meetings between lawmakers and top administration officials Wednesday.

The White House's budget proposal next week builds upon an earlier outline in March that called for a nearly 10% boost in defense funding next year, offset by around $54 billion in cuts for nondefense programs.

While there is bipartisan support for more military funding, Democrats and even some Republicans have balked at the magnitude of spending cuts Mr. Trump outlined.

Next week's budget document will outline additional cuts to programs that aren't subject to annual spending bills, such as anti-poverty spending or Medicaid, which could meet strong resistance in Congress.

Among the more controversial elements of the budget will be the administration's growth forecasts. The White House projects the nation's economic growth rate will rise to 3% by 2021, compared with the 1.9% forecast under current policy by the Congressional Budget Office. It's unusual to see the White House's growth forecasts differ from the CBO and other blue-chip projections by such a large margin over such a long stretch of the 10-year budget window.

The CBO and other forecasters see retiring baby boomer workers and slow worker productivity growth continuing to restrain output in the years ahead. But the Trump administration argues tax and regulatory cuts can reverse the trend.

"This president campaigned on economic growth," said the budget official. "That's the debate we want to have: What are the economic policies needed to get there?"

Economists polled by The Wall Street Journal earlier this month said they believed Mr. Trump's policies were likely to boost growth to 2.3% over the long run versus their baseline expectation of 2% growth over the same period.

Overly aggressive growth assumptions could undercut the administration's ability to sell its agenda to Congress.

"I am extremely pessimistic that you can show a balanced budget unless you're going to make the mother of all 'rosy scenario' type assumptions, " said William Hoagland, a former congressional Republican budget aide who is now at the Bipartisan Policy Center in Washington.

The budget won't present final details on the president's tax proposals, but it will include an estimate that any tax overhaul will be revenue neutral, meaning revenue lost from rate cuts will be made up by curbing deductions, eliminating tax breaks and revving up economic growth.

The administration will provide more details on the president's infrastructure spending plans. Officials have previously said they would seek $200 billion in federal spending, which when combined with private sources of funding could finance up to $1 trillion in infrastructure.

Under current policy, the CBO expects deficits to rise from around 3% of gross domestic product today to 4% early next decade and 5% by 2027. That would swell the national debt from around 77% of GDP to nearly 89%. Mr. Trump will present a budget forecast that shows the national debt declining to 60% of GDP by 2027.

Democrats have pre-emptively criticized Mr. Trump's proposed spending cuts and growth forecasts. "It is an ideological document, not a document that will ever be utilized," said House Minority Whip Steny Hoyer (D., Md.) at a press conference on Thursday.

Some Republicans could be reluctant to vote for large tax cuts that assume an uncertain pickup in growth. "For a budget to have any meaning, it's essential we have realistic assumptions in terms of economic growth and in terms of spending reductions," said Rep. Mark Sanford (R., S.C.).

While the Trump forecast will show a large increase in the country's growth rate, it won't show nearly as much of an increase in government borrowing costs. The White House budget official said the forecast will show yields on benchmark 10-year Treasury notes rising to 3.8% by 2020, which is only slightly higher than the CBO, which estimates rates rising to 3.6% over the next decade.

Faster growth often goes in hand with higher rates. Since 1962, the relationship between growth, inflation and interest rates implies Treasury yields of around 5% or more when growth is 3%.

In a speech Wednesday, budget director Mick Mulvaney said without a large, sustained rise in the nation's output, it wouldn't be possible to balance the budget without higher taxes because the spending cuts required would be too large. He pointed to the late 1990s as an exemplar for the current administration.

"The way we balanced the budget in the 1990s is we had spending restraint and GDP growth caught up -- government revenues caught up, as the GDP growth came in," he said. "That's what we're trying to get back to."

--Kate Davidson contributed to this article.

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

(END) Dow Jones Newswires

May 18, 2017 21:14 ET (01:14 GMT)