Will budget deal cause economy to overheat?

Don Lee, Tribune Washington Bureau on

Published in Business News

WASHINGTON -- If the GOP's $1.5-trillion tax-cut package powers the American economy like rocket fuel as President Donald Trump predicts, the new congressional budget deal could become the extra boost that causes the engine to overheat.

The budget compromise that was struggling late Thursday to win passage provided a bipartisan answer to the latest fiscal crisis. But lawmakers did so by raising spending caps on military and non-defense programs that will add $300 billion to $400 billion to the deficit.

Coming on top of the tax cuts passed late last year, the increased spending caps -- plus tens of billions of additional dollars for disaster relief -- will throw more fuel to an economy that is already perking up.

Analysts say that raises the odds of higher inflation and interest rates, precisely the concerns that in recent days have stoked investor fears and stock market volatility, which continued Thursday with a second 1,000-point drop in the Dow this week.

The budget deal also means that the United States probably will be returning to trillion-dollar annual deficits next year -- much sooner than expected and under a government controlled by Republicans, who traditionally had identified themselves as the party of fiscal probity.

When Trump took office about a year ago, the Congressional Budget Office projected that the nation's deficit would run between $500 billion and $700 billion annually for a few years, not breaching $1 trillion until 2022.

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With lower tax revenues expected and now additional spending and an accompanying agreement to lift the debt ceiling, some experts reckon the deficit will blow past $1 trillion in fiscal 2019 and keep rising from there.

"This deal shows we're in a permanent era of trillion-dollar deficits," said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, a nonpartisan advocacy group. While spending caps were lifted by about $150 billion each for this year and next, Goldwein says it's almost certain that the higher limits will become the new baseline.

"There's no way Congress is going to let spending fall $150 billion in appropriations," he said.

Treasury Secretary Steven T. Mnuchin has said that the president is very concerned about the increasing debt. And on Thursday, deputy press secretary Raj Shah said the budget the White House plans to release Monday will show a "path" toward declining deficits. "Economic growth is essential to cutting deficits," he said. "We are committed to fiscal discipline."


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