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Republicans brace for debt clash with Trump

Conservative Republicans are girding themselves for a clash with Donald Trump’s administration, warning that lax spending plans could put national debt on a steeper upward trajectory.

The president has wrongfooted Republican deficit hawks by proposing to slash tax, protect social security and Medicare, boost defence spending and build a wall along the border with Mexico.

Some lawmakers fear even fiscally conservative colleagues will buckle in the face of Mr Trump’s demands rather than risk a fight with the president. A key moment comes in February when the president presents his first outline budget plans.

“The worrying thing is the new administration seems to be focused on wishful thinking on how much growth we can squeeze out of new policies, rather than grappling with hard choices about how to pay for new initiatives,” said Maya MacGuineas, head of the non-partisan Committee for a Responsible Federal Budget. 

“Republicans want smaller government but the question is, are they willing to get there by cutting spending? You don’t get smaller government by cutting taxes — you just get more debt.” 

Mr Trump’s border wall is already a point of contention, with some lawmakers attacking the measure as a potential white elephant. Will Hurd, a Republican congressman from Texas, which will be heavily affected by the project, said: “It’s a waste of tax dollars. You can potentially end up with another ‘bridge to nowhere’.”

Official figures last week showed public debt swelling by $10.7tn over the coming decade to the highest as a share of gross domestic product since 1947. As they eye those numbers some fiscal conservatives are worried about the prospect of budget plans being linked to overly optimistic growth assumptions denigrated by Senate aides as a “magic asterisk”. 

Senator Mike Lee of Utah put down a challenge to the party leadership last week by introducing a balanced-budget amendment to the constitution. He signed a letter this month with Marco Rubio and Ted Cruz calling for Congress to balance the budget in 10 years without the use of “gimmicks” to disguise deficits. 

The Republican Study Committee, a grouping of conservative House lawmakers chaired by North Carolina congressman Mark Walker, has echoed the call. “There is a healthy memory of the mistakes made by congressional Republicans under previous Republican administrations,” said a senior staffer from the committee. 

“The party is not unanimous on this topic, and there are always going to be those who want to prioritise other investments or who don’t think this is the crisis of the moment, but if we don’t act now it is going to be harder and harder to adopt a budget that will balance within 10 years.” 

Mr Trump’s defenders have argued for spending cuts even as they reprise the tax-cutting rhetoric of conservative Republicans in the late 1970s and early 1980s, popularised by Professor Arthur Laffer, and insist that buoyant growth will go a long way to helping address the country’s deficits. 

“If you change the growth rate assumptions it changes everything,” said Steve Moore, a former Trump adviser who is chief economist at the Heritage Foundation. 

“If you look at the late 1990s, the last time we balanced the budget no one expected that, no one thought it was coming. We got a surge in the stock market and a boom in the economy and the revenues started flooding into the government.” 

If the president presents his preliminary budget next month with figures showing a surge in borrowing it will jar badly with campaign vows to pay off the national debt. Yet overly rosy growth expectations will also meet with scepticism, said Ms MacGuineas. At 4 per cent, the administration’s ambitious growth target is more than double the expansion predicted by the non-partisan Congressional Budget Office last week.

“I don’t think we can grow out of our debt burden right now, even if the tax base expanded significantly because of economic growth,” said an aide to Mr Lee. “You will still have to look at some spending cuts.”

The Trump administration has been considering ways to curb spending, but hanging over discussions are Mr Trump’s campaign pledges to leave social security and other entitlement spending intact even as he fulfils ambitions to reduce corporate and personal taxes and boost investment.

In a sign of the internal divisions, representative Mick Mulvaney, Mr Trump’s nominee for budget director, last week signalled he would urge cost reductions to social security and health programmes even though the president argued during the election that they should be left intact.

The new figures from the CBO confirm how central entitlements will be to any effort to curtail spending growth. Overall spending is projected to rise by $2.6tn from 2017 to 2027, with no less than 70 per cent of the growth fuelled by social security, Medicare and interest as the population ages.

By contrast, defence will account for just 6 per cent of the growth over the same period and other discretionary areas, such as education, just 4 per cent.

Among the options available on entitlement reform are reducing benefits, for example via means testing, raising the retirement age to 70 or lifting the earnings ceiling on payroll tax contributions. Mr Mulvaney said multiple levers might need to be pulled but some of them were unlikely to yield dividends in the coming decade.

Financial markets have already voted with their feet, however, plugging in assumptions that Republican leaders will emerge from the coming negotiations presiding over higher budget deficits.

Via FT

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