The U.S. looks set to rack up bigger budget deficits in the coming years, no matter who is elected president.
With Donald Trump declaring himself the "king of debt" and Hillary Clinton promising to "build tomorrow’s economy," the next administration seems likely to put more emphasis on fiscal largesse than on financial rectitude.
"The floodgates aren’t going to open, but you’re probably going to have a modestly looser fiscal policy," said Andy Laperriere, a partner at Cornerstone Macro LLC in Washington and former Republican staffer on Capitol Hill.
The potential shift could add the equivalent of slightly less than one percent of gross domestic product to the deficit, spread out over 2017 and 2018, according to Alec Phillips, U.S. political economist for Goldman Sachs Group Inc. in Washington. The budget shortfall totaled $438.4 billion, or 2.5 percent of GDP, in the fiscal year ended Sept. 30, according to the White House.
Phillips said such a boost might lift annualized economic growth by around a few tenths of a percentage point later in 2017 and in 2018. With the economy expanding an average 2.1 percent per year since exiting the recession in June 2009, that would be a material addition.
If it occurs, it would bolster the confidence of Federal Reserve policy makers in the staying power of the expansion and make it more probable they’ll raise interest rates by a full percentage point next year, according to Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Central bank officials in March penciled in four quarter-percentage point rate increases for next year after two planned for 2016.
The talk of bigger budget deficits comes after four straight years of declines that brought the annual shortfall to its lowest level since 2007. It also coincides with increased calls from investors, academics and even central bankers for the government to loosen its fiscal reins.
With interest rates as low as they are, "it seems to me there’s a case" for investment-oriented budget policies, Fed Chair Janet Yellen told the Economic Club of New York on March 29.
Based on current policies, the deficit is already projected to climb, to $534 billion this fiscal year and $550 billion next, driven in part by increased outlays for Social Security and government health-care programs, according to the Congressional Budget Office.
Presumptive Republican presidential nominee Trump has gone from promising to eliminate the nation’s $18 trillion debt in eight years -- a move that economists say would drive the U.S. deep into a recession -- to suggesting that the government could just print money to finance its deficits.
The thrust of his proposals probably would lead to more government red ink and a bigger fiscal stimulus to the economy, budget analysts said. At the top of the list: a huge tax cut plan that the Tax Foundation says would increase growth significantly at a 10-year cost of more than $10 trillion in lost revenue to the government.
The real estate developer also has come out in favor of increased spending on defense and infrastructure such as roads and bridges and has vowed not to cut outlays on Social Security.
Clinton, the frontrunner to be the Democratic Party’s presidential nominee, has put forward a bevy of detailed proposals for more government expenditure, including a five-year, $275 billion infrastructure program and a plan to make a college education more affordable that would cost $350 billion over 10 years.
Unlike Trump, the former secretary of state has spelled out how she intends to pay for her desired extra spending, earning the praise of the Committee for a Responsible Federal Budget for at least doing that. Most of her financing involves higher taxes on the wealthy, measures which Crandall said might be difficult for legislators to approve.
Much will depend on what happens in congressional elections also taking place in November. A sweep by Clinton that turns control of Congress over to the Democrats or a big victory by Trump that increases Republican majorities would probably lead to even more spending and bigger deficits, Laperriere said.
A more likely outcome is that Republicans retain control of the House of Representatives and neither party has a filibuster-proof, 60-vote majority in the Senate. That will limit how profligate either can be.
"The fact that you’ve got to work with the other side is going to moderate all your proposals and tend to reduce the effect on the deficit," said Diane Lim, an economist at the Committee for Economic Development who worked on congressional budget committees in the late 1990s and early 2000s.
What’s more, the Republican caucus in the House is likely to be more staunchly opposed to government spending after the election because any losses the party might suffer in November will be among its more moderate members, said Howard Gleckman, a senior fellow at the Tax Policy Center in Washington.
Goldman Sachs’s Phillips said one area of potential agreement after the election could be stepped-up expenditure on infrastructure, which both Trump and Clinton favor and which has been backed by business and union lobbyists.
"The bloom is off the rosebush in terms of focusing on fiscal restraint," said William Hoagland, a senior vice president at the Washington-based Bipartisan Policy Center and a former budget staffer on Capitol Hill. "There is now an atmosphere and an environment for a loosening of policy."
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