President Trump and Maine Democrats have something in common. Their initial budget proposals count on future revenues to cover current costs.
Trump has not yet unveiled his full budget. But he has announced agency budget cuts and “massive” tax cuts that will not raise the federal debt.
He forecasts four percent economic growth, which will provide sufficient new tax revenues. The strong gains would result from growth prompted by less regulation.
The tax cuts would be permanent, but there’s no way of knowing if his projected revenue boost would materialize or last over time.
The level of economic growth Trump projects may occur in new economies, especially in low-income, resource-rich developing countries. In a huge, mature economy like in the U.S., the added activity to create that amount of growth is not possible, and it has no precedent.
In fact, the U.S. would be doing quite well if it could sustain growth at two percent, half Trump’s forecast, for an extended period. The country may hit that rate in any given quarter, but maintaining it indefinitely may be out of reach.
An economy may boom for a short while, but sustaining long-term high growth cannot be expected. How, then, does a country cover lost revenues or increased spending when the boom tapers off or when the country faces unexpected challenges requiring it to make unexpected expenditures?
In the future, as revenues fail to achieve their forecast levels, some spending, already reduced, would have to be cut even more. The only other alternative is to raise taxes to keep the federal government operating.
Just as more deficits leading to more debt pushes the cost of government into the future to be paid by the children and grandchildren of today’s taxpayers, so does funding current spending and tax cuts by projected future gains in government tax revenues.
Not only is it unlikely those revenue gains will materialize, but it is virtually certain they would not last at a sustained high level. But the spending will have taken place and the tax cuts will have been made permanent.
So Trump can look good now by cutting taxes and promising huge spending on roads, bridges and other infrastructure, but the bill will come due under a later president who will face the unenviable task of raising taxes. It’s paying for today’s costs by smoke that hides the price that others will pay.
Meanwhile, Maine Democrats have issued their budget priorities, not a full budget. They propose to pay the 55 percent of school costs voted by referendum, increase municipal revenue sharing and recover some lost public health nurse positions. Their proposal is being sold as a major property tax break.
Some of the costs would be covered by the tax increase on the wealthy voted by referendum last year. Some funds would come from the sales tax that Amazon will begin collecting in Maine to pay the state. And some will come from a tax on recreational marijuana.
The Democrats also propose bond issues for capital costs. While that may make sense, they do not include the cost of debt service in their proposal, at least as circulated.
But the largest chunk of money to cover proposed costs will come from added tax revenues, a forecast based on the state’s economic growth. While all of the new costs proposed by the Democrats are meant to be permanent, the higher tax take, even if it really happens, offers no certainty of being as permanent.
What happens to the big property tax break when the economy slows down? Either it begins to melt away or revenues have to be found in the form of an income tax increase. So today’s spending would have to be paid in part by tomorrow’s taxpayers.
It’s likely that neither Trump nor the Maine Democrats will succeed. Both would need the support of their political opponents. Both face special interests. The real issue is whether the end result will depend on forecasted revenues, less ambitious spending or higher taxes.
The problem is not Trump or the Democrats. We like what government can do for us, but we dislike paying more taxes. The current proposals shift the “paying” part to an optimistic view of future revenues or to future generations.
Politicians make budget-making look like magic: you get something without paying for it.
It’s not magic. Somebody pays, probably later and more.
Political leadership should make clear that what we want now, we should pay for – now. That would be responsible budgeting, which requires political courage.