Abacus: President Trump’s 2020 Proposed Budget And Its Economic Ripples
The Trump Administration proposed its 2020 budget this past Monday. The $4.7 trillion budget aims at bringing “Federal spending and debt under control,” along with cutting funds for Social Security and Medicare with an increase in border protection programs.
President Trump’s proposal is the largest budget ever, presented to the Congress, which intends on increasing the budget deficit by $1.1 trillion, in hopes of a strong economic year and a promise of eradicating the fiscal deficit in the next 15 years. The budget deficit peaked in 2012 when government spending was increased to combat recession.
A budget deficit is when the government spends more than it receives in taxes. A rising deficit can lead to many repercussions. Each year, the budget deficit is added to the national debt ($22 trillion) which is compared to the GDP of the economy. A higher Debt-GDP ratio reflects poorly on the country’s ability to pay back its debt - leading to fewers lenders.
A lack of lenders may even lead to high-interest rates from the few lenders who might be willing to take the risk of lending money to the country. This means that people will not buy government bonds and the US will face difficulty in borrowing money from international markets, ultimately leading to a weaker dollar.
A country that is trying to reduce its budget deficit has two options only: either increase revenue or decrease spending. Although an increase in revenue always seems like a better option, in the long run, the decade long economic boom, if not controlled, can turn into inflation. Thus, reducing government expenditure can help in diminishing the fiscal deficit.
The proposed budget demands for a five percent increase in military spending along with an $8.6 billion for the south border wall. President Trump increased the military expenditure to $750 billion more than what the Pentagon had asked for, along with a $9 billion increase in the ‘emergency’ fund.
The US military budget proposed for 2020, is equivalent to more than 10 of the biggest government expenditures combined. The next biggest US government department, Health and Human Services ($89.6 billion) is less than one-tenth of total military spending.
An increase in military expenditure has always been bad for the economy. During times of war, military expense rises, with a rise in budget deficit as well. The War of Terror with the Middle Eastern countries after 9/11 added $2.4 trillion dollars to the budget deficit.
An easy way to cut down the budget deficit is to reduce nonessential spending. Almost two-thirds of the government budget are designated to mandatory spending, which includes Social Security, Medicare and Medicaid.
Costing more than $1.2 trillion, the Social Security Fund receives only $949 billion from taxes. If this expense is not reduced soon, the expenditure might surpass the income of Social Security funds, restricting the Congress to use Social Security Trust Fund as a piggy bank for other departments.
Although reducing spending is a good way to reduce the deficit, it is always advised to reduce unnecessary expenditure and promote expenses that act as an investment for future generations like health care, education and infrastructure.
President Trump increased military spending by 5 percent, commerce and Homeland Security by 7 percent each along with cutting down all the other non-defense military expenses like Environmental Protection Agency by 31 percent, Education by 12 percent and axing Housing and Urban Development by 16 percent.
The proposed budget cuts will pull nearly $2 billion from the Education Department and the Pell Grant, which is the only available option for a lot of students to avail higher education.
Medicaid and Medicare, another big expense that mounts up to $418 billion and $679 billion respectively. In the times where many Democrats are pushing for a healthcare system of all, the proposed budget is to save nearly $845 billion over 10 years from Medicare as we know it. These savings will be achieved by reducing unnecessary spending in the like tracking social media of the people who claim disability credits while not being disabled along with reducing the cost of prescription drugs.
In the times of peace, increasing military spending and reducing mandatory expenses might backfire on the Trump administration which is heavily banking on a strong economic growth year to sustain the proposed budget. An additional cost of nearly $9 billion for President Trump’s dream project: the South Border wall also adds on to unnecessary expenses that will increase the government spending leading to a higher budget deficit.
A higher budget deficit can also mean an increase in interest rates. For the Fiscal Year of 2020, interest on national debt is expected to be $479 billion. With Democrats controlling the House of Representatives and many Republican seeking fo re-election is 2020, the proposed budget has really less hope of reaching the Senate floor and even fewer chances of being signed into law. But, knowing President Trump, he will try all the tricks in his book to get his budget passed by hook or by crook which might be detrimental for the economy.