Proposed GOP Spending Cuts: A Disappointment, or a Down Payment?

A new move in the fiscal-economic chess game sheds some light on what Trump and the GOP are planning. And I include quotes from The Washington Post!

The White House and congressional Republicans are reportedly zeroing in on a consensus budget with tax rate relief and no major budget cuts. The spending reduction currently under consideration would be $315 billion over 10 years, a minuscule amount, and the GOP proposes to spend an additional $325 billion on military upgrades and immigration enforcement.

Most of the planned spending reduction will be through tightening of Medicaid eligibility, The Washington Post reports:

The House Energy and Commerce Committee was assigned the most cost-cutting, two of the people said, at $200 billion. Much of that can be accomplished by imposing work requirements on enrollees for Medicaid, the public health insurance program for low-income individuals, the people said. The first Trump administration allowed 13 GOP-led states to add work requirements to their Medicaid programs, a controversial change that was the focus of legal battles. The requirements only took full effect in one state, Arkansas, for a five-month period when about 18,000 people were dropped from the program.

That one item of entitlement reform would be a small but notable move toward focusing Medicaid on the truly needy, though the WaPo article declined to acknowledge that. There is much wrong with Medicaid, a terribly wasteful program that raises health care prices for everybody, and work requirements could be a first step in reducing its damage to the nation’s health care system and the federal and state budgets.

The WaPo piece documents a couple of other expected spending cuts that, like the proposed Medicaid work requirement, trim a little bit of fat from the edges of massive federal government programs:

The Agriculture Committee, assigned to slash $50 billion, is eyeing limiting future expansion of food stamp benefits—formally known as the Supplemental Nutrition Assistance Program—and adding work requirements for that benefit.

The Oversight and Government Reform Committee, the people said, is weighing requiring certain federal employees to contribute more to their retirement program, which could save $4 billion over 10 years, according to the Budget Committee’s projections.

Those are very small spending cuts, as I noted above. WaPo’s sources—“three people familiar with negotiations”—say the cuts are needed is because the “party leaders have decided to write off the multitrillion-dollar cost of new tax cuts.”

That is an inaccurate way to state the situation. As the note in the (deceptive) WaPo table below acknowledges, the GOP leaders are just not designating their proposed renewal of the tax rate cuts in the Tax Cuts and Jobs Act (TCJA) of 2017 as new tax cuts:

That decision makes sense because the rate cuts have been in place for eight years (other than some relatively small Biden-era reversals) and hence do not constitute new cuts. Instead, the extension of the cuts will avert a massive tax hike that would surely slow the economy and thereby reduce federal tax revenues.

Looking at the totals on the graph, you can see that all of the alleged $2.5 trillion in the deficit is subsumed within the $5.5 trillion “tax cut” WaPo wants to attribute to renewal of the TCJA. Without that alleged tax cut, the budget effect of the proposed changes is essentially zero or possibly beneficial on net.

What all this means is that the budget cuts in the proposed legislation are intended essentially, and probably even solely, to prevent the tax rate cuts from being seen as raising the federal budget deficit. “Those cuts are floors, the people say, and Republicans will aim to reduce spending far beyond them where possible,” the WaPo story notes.

These cuts appear to be nothing more than an at-least partial concession to “revenue neutrality”: the Congressional Budget Office’s habitual refusal to consider the revenue-boosting quality of tax rate cuts and to score tax rate changes as “static” alterations that will not appreciably affect the behavior of the people who currently pay those taxes (and thus reduce real, inflation-adjusted revenues instead of increasing them). That is an entirely false assumption, but it is ingrained in analysts’ perceptions and in the congressional requirements for budget deals.

The suggestion, as the WaPo quote about the proposed cuts being “floors” indicates, is that the GOP will later make much more significant cuts through Trump administration rule changes via the Department of Government Efficiency, and also through later congressional action. They certainly should make those further cuts, to the tune of another $1.8 trillion to $2 trillion a year.

Adding to the impression that the proposed budget cuts are meant as a small down payment on serious budget reform is the fact that they do not attempt to cover Trump promises such as not taxing tips, overtime wages, and Social Security benefits. The WaPo story suggests the paper’s unnamed sources within the GOP expect to include projected revenue from Trump’s tariff increases to offset these tax cuts. That is just more budget-scoring strategy to ensure that the bill can be endorsed as revenue-neutral.

Note that all true, inflation-adjusted increases in federal revenue arise from tax rate cuts and elimination of tax categories, not tax hikes or new taxes. Cutting taxes is always good from the standpoints of both budget-balancing and freedom for the American people.

On the whole, it appears that the GOP team is trying to tread a fine line between “irresponsible” tax rate cuts (which are always good, contrary to conventional thinking) and further expansion of the federal deficit and debt. The latter effect is a fiction that depends on false, static revenue expectations, as I noted above. Tax cutters must confront that reality, however, so these small proposed spending cuts are welcome beyond their function in trimming some waste, because they allow for much-needed cuts in tax rates.

GOP lawmakers worked out this plan at a policy retreat last week, with the idea being to pass the budget as a reconciliation package because that requires only a majority in the Senate and would thus avoid a Democrat filibuster. The lawmakers “departed with significant buy-in on the plan,” but there are serious hurdles ahead, most prominently the inevitable objections from deficit hawks.

The House Freedom Caucus has already expressed opposition to the plan and has offered a two-page outline of their alternative, the WaPo story reports. The caucus members are right to note that the need for serious spending cuts is urgent. They might not be right in thinking that the current budget reconciliation bill is the place to do it.

I am in sympathy with the Freedom Caucus, though my objections to the federal spending trajectory go far deeper than the current budget under consideration. I am a “freedom hawk” and a “growth hawk,” not a doctrinaire (and static measuring) budget hawk. For me, tax policy is about two things, in this order: individual liberty, and economic growth—with individual liberty being the most important factor by far. That is why I want huge spending cuts: for freedom.

Even beyond those considerations of principle, however, the nation needs spending reductions right now. The massive Biden-era expansion of government spending and debt, in a time of ongoing aging of the nation which has been steadily reducing the taxpayer to tax-consumer ratio, has created the conditions for a federal debt spiral in which ever-increasing government spending baked into present laws is exacerbated by ever-increasing interest payments for money the federal government has already spent.

The United States is on a path to a government-caused economic catastrophe—liberty having already been cast aside early in the twentieth century. President Trump and the congressional Republicans have been complicit in recent years, though the Democrats and President Barack Obama and Joe Biden have been the real culprits in recent years. Nonetheless, it falls to the Republicans to fix it, if that is even possible at this point.

I certainly do not trust congressional Republicans to show any courage and do what needs to be done. They have repeatedly failed to live up to their claims of fiscal conservatism.

However, I can see some sense in the plan as reported thus far. The cuts of about $2 trillion a year I see as absolutely necessary are, to my thinking, in themselves only a small down payment toward restoring reasonable spending by the federal government and limiting the latter strictly to authorities enumerated in the Constitution, and no funny stuff about stretching the Interstate Commerce Clause to include federal control over mud puddles and what people grow in their backyards.

Without some sort of legislation that extends the TCJA tax rate cuts and adds new cuts, however, the U.S. economy may tank before anyone can restore anything like reasonable governance in Washington, D.C. Get that done, and then we may dream about perfection.