WASHINGTON. The House of Representatives has just passed a two-year budget bill covering fiscal 2020 and fiscal 2021. The deal calls for a $322 billion increase in spending over the next two years. However, before the budget bill can be implemented, the Senate will have to pass it. Then the President will have to sign it before mid-September when the government would formally lose the authority to spend money.
The budget bill and its consequences are one result of the massive public debt on the government books reaching its legal limit. Like that 800-pound gorilla in the room, the public debt continues to grow because the Federal government continues to spend more money than it receives in revenue. This year the Federal government deficit will exceed $900 billion. So why is the government planning to spend even more in accordance with the House budget bill?
The Federal government deficits continue to mount, stretching back many years
Every year for the past 19 years and for 63 of the last 67 years, our irresponsible Federal government has routinely spent more than it receives. To finance the shortfall, the government almost continuously sells bonds, accruing public debt. Adding insult to injury, the government pays out annual interest to those individuals and institutions that hold these bonds. With government indebtedness continuing to grow, what happens when those bonds mature? The simple answer: Like all bonds, upon maturity, government bonds must pay out the original principal to all its bondholders. That’s because bonds are very much like a long-term loan that ultimately must be repaid.
Since there is no mechanism in place to secure the funds to repay the bonds, the government simply sells new bonds to pay off the old bonds. The result? As the government keeps rolling over the public debt, the government indebtedness keeps growing.
Currently, the Federal — i.e., public — debt now totals $22 trillion. That amounts to a number approximately 10% more than the annual US GDP.
Interest on that debt approaches $500 billion per year. As interest rates rise and the debt grows the annual interest expense inevitably continues to increase. And the spending in the new budget deal, if implemented, increases the public debt by $322 billion more.
Why will Trump agree to this?
Conservatives as always find themselves recoiling from this latest Federal spending madness. Spending of money that the government simply doesn’t have. President Trump is a businessman and understands full well the pitfalls of carrying too much debt. He also understands the problems associated with annual deficits and excessive spending better than most. Yet he will likely agree to this budget deal. Under duress. Since Trump always plays the long game, we can easily explain his approval of this budget by looking toward the future.
The President set out a number of goals on US fiscal policy. He wants to reduce the size of government and the amount of money the government spends. He wants to keep tax rates as low as possible and ultimately balance the Federal budget. Or at least reduce the Federal deficit to a much lower number. Eventually, he would like to reduce the public debt and rebuild the military to confront this increasingly treacherous century.
The GOP-controlled Senate wishes to pursue similar goals. The problem lies in the Democrat-controlled House of Representatives. As always, the Democrat majority wants to vastly increase government spending on domestic programs, increase the size of government, raise taxes to keep redistributing income. And they don’t want to be too concerned about deficit spending.
Considering the current make-up, Trump is looking for the best deal possible, even though he said he would “never again” agree to a budget with a large deficit.
Let’s make a deal
Trump knows that he must make a deal that helps him reach his goals and one that both houses of Congress will approve. The long-term problem with reducing government spending is that more than 70% of the Federal government budget is virtually untouchable. The “entitlement” part.
More than 60% of government spending is for various entitlement programs: Social Security, Medicare and Medicaid. Politically, it is nearly impossible to reduce spending on those programs. Any politician who suggests cuts in entitlements would never be elected to any office. But at some point, the goverment needs to get serious about out-of-control spending on entitlements. Given that about 10% of the Federal budget gets spent on interest on the public debt, Congress has a long, long way to go.
In any event, the huge entitlement budget leaves about 28% of the Federal budget where spending remains somewhat discretionary. Roughly half of that is for defense and half ends up going toward all other domestic programs. Since the President wants to spend more to rebuild the military, he needs to agree to spend more on domestic programs to get the final bill past the House Democrat extortionists eager to show fresh goodies they’ve “obtained” (at taxpayer expense) for their constituents. This always looks good in an election year..
Weighing the odds
Trump probably reasoned that he wanted to get through the 2020 election, where the Democrats, the media and GOP die-hard #NeverTrumpers will again try to destroy him. He hopes that he will be re-elected and that the GOP can once again control of the House of Representatives and increase their majority in the Senate. Once that happens (if it does), Trump can pursue his other goals. They include reducing spending and reducing or eliminating deficits. And will eventually launch another attempt to reduce the public debt. He wants to do this while keeping tax rates low.
He also knows that to reach those goals, spending on the entitlement programs must be contained. While no president has yet found a painless way to do that, the best alternative might include a move to raise the official retirement age to 70 or 72 or even 75. Since increasing numbers of Americans now live well into their 80s and even their 90s, this should prove politically possible. But Trump must emphasize that changes do not affect current retirees or those within a few years of retirement.
The current flawed budget deal may be the best alternative that the Swamp can achieve at this time. Even though the deal goes against basic conservative principles, this short term solution may allow Trump another term to reach his long-term goals.
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