May 25, 2017 Reading Time: 2 minutes

Earlier this week, President Trump released his proposed budget for 2018. The budget is ambitiously titled “A New Foundation for American Greatness.” The White House forecasts that the new budget would eliminate the federal deficit in 10 years. President Trump would balance the budget by cutting $3.6 trillion in federal spending over the next decade. Reducing the federal deficit would slow down growth in the national debt.

The federal-debt-to-GDP ratio recently reached a record level, and the deficit is large by historical standards. If both the deficit and debt go unchecked, federal spending on interest expense will squeeze other priorities. Further, the sheer amount of federal debt will crowd out more-productive investment by the private sector.

President Trump’s budget plans to reduce the deficit and control the debt by making deep cuts to government programs including health care, nutrition, and disability. He plans to reform Medicaid by letting states choose a per capita limit or a block grant. States would then be allowed to prioritize how to spend Medicaid funds. The administration expects the reform to cut $610 billion over 10 years. The budget also plans to reduce spending on nutrition programs and disability by tightening eligibility requirements. Other nondefense discretionary spending would be reduced by 2 percent per year.

On the campaign trail, Trump promised not to touch Social Security and Medicare. Reducing the budget deficit will be difficult without addressing these massive entitlement programs. In 2016, Social Security was the largest slice of federal spending at 4.9 percent of GDP. In 2016, the United States spent as much on Medicare as it did on defense.

Military spending, border security, and infrastructure will likely get more funding. President Trump proposed a $640 billion increase in military spending. The president will stick to another campaign promise, a wall along the border with Mexico. The budget proposal asks for money to build the wall and to increase border security. As for infrastructure, the budget asks for new investments in roads, bridges, and aviation. Streamlining regulations will help lower the cost of infrastructure upgrades.

Concurrently with the budget plan, Trump has proposed cutting business taxes and income taxes and rolling back regulations. The United States currently has the highest corporate tax rate in the developed world. President Trump plans to cut the rate from over 35 percent to just 15 percent. This should support hiring and business spending on plant and equipment. Cutting income taxes and regulations would do the same. Hiring and business investment could in turn increase federal tax revenues and prevent the tax cuts from contributing as much to the deficit and debt.

Will President Trump be able to send his budget through Congress? It is unlikely. The Democrats remain steadfastly opposed to Trump’s agenda, while some Republican members of Congress would risk losing reelection if the budget cuts hit their district. 

Theodore Cangero

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