Why the federal deficit is rising, despite economic growth

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• Amna Nawaz:

  Numbers out this week show the federal budget deficit taking a big jump over the last spending year, despite significant economic growth.

  John Yang takes a look behind the data.

• John Yang:

  Amna, the government reported it just ended the fiscal year with a deficit of $779 billion. That's a 17 percent jump from 2017.

  The number is getting close scrutiny because most of President Trump's $1.5 trillion tax cut took effect in January, just three months into the spending year.

  Here to walk us through all this, the "NewsHour"'s correspondent Lisa Desjardins, and David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.

  Lisa, let me start with you.

  How does this number for 2018, the 2018 fiscal year, how does that fit into historical trends?

• Lisa Desjardins:

  This is a dramatic increase in recent years. Let's look at some numbers.

  You go back just three years ago, 2015, the number of the deficit that year was $439 billion. Look at that. This is almost double what it was then. And it's going to continue to rise, John, many people know.

  Look, in just two years, it's going to be right around $1 trillion, according to the Congressional Budget Office. And that curve, John, continues to get even steeper as we continue to go forward.

  Now, what's interesting here is, this still is not as high as the deficits were in 2009 and 2010. Those were historic highs in relatively recent terms. However, those were years in which we had a recession. We're talking about these deficits now in times of growth and a good economy. And that is different.

• John Yang:

  And, of course, those projections are if current law stays into effect, if nothing were to change.

  Now, what's driving the 2018 deficit?

• Lisa Desjardins:

  That's right. So if you look deep into the numbers that the Treasury Department put out, you find some very interesting things.

  First of all, in this year, talking about taxes, we look at these numbers, you see that actual tax revenue stayed about flat. It rose about half-a-percent, a little bit less. But spending is what has changed most dramatically.

  So you have got flat revenues, and you have got a lot more spending, less — not money coming in, a lot of money going out, you get a deficit. Where was the bigger — where were the bigger increases? Defense spending — $65 billion increase just in the past year.

  And look at that interest on the debt. We saw an increase of $62 billion in what we're spending to pay off this debt. Now, of course, defense wasn't the only place we saw an increase, but that — also non-defense, but it shows Congress spent a lot more and we have a larger deficit.

• John Yang:

  So, David, the — Lisa says that the revenue is remaining flat. So what does that tell us about the effect of President Trump's tax cuts?

•  David Wessel:

  Well, the economy, as Lisa said, is very strong. And so without a tax cut, we would have seen increasing revenues.

  We also see, if you look at the numbers, corporate tax receipts fell 30 percent. And that's largely the result of the president's tax cut. So what we're seeing — you would expect at a time like this revenues rising faster than spending, because the economy is strong, more people working, paying taxes, fewer people collecting unemployment benefits and such, and the deficit would shrink.

  We see the opposite, and that's largely because of the tax cut.

• John Yang:

  Now, David, Senate Majority Leader Mitch McConnell says it's entitlements. He said Social Security, Medicare, Medicaid, that's what's driving these deficit forecasts.

  Is he right?

•  David Wessel:

  Well, look, if you look at what happened last year, it's not Social Security, Medicare and Medicaid. It's taxes.

  The size of the tax cut was about in — according to CBO, was about $165 billion. The deficit increased by $113 billion. Do the arithmetic.

  If you look ahead, though, and you look at the projections, the reason the deficit is rising is because we are spending more on Social Security, Medicare and Medicaid, largely because the population is aging.

  If you look at CBO's 10-year projections, spending on benefits, particularly for elderly people, are going up. Interest on the debt is going up. And everything else is holding or going down.

• John Yang:

  Lisa, the deficit had stopped being a hot-button issue for a long time. Now it's sort of — it's back on the front pages.

  Is Congress, do you think, going to do anything about this?

• Lisa Desjardins:

  No.

• John Yang:

  Short answer.

• Lisa Desjardins:

  My short answer, no.

  You have an entire caucus of conservatives, the Freedom Caucus, who have led with this issue in the past, but they are the ones who ended up voting and passing some of these larger spending bills in a deal with Democrats. Republicans wanted more money for defense. Democrats wanted more money for non-defense. They all came together.

  I spoke to Senate Leader Mitch McConnell about this yesterday. He agreed that, for now, it looks like the spending increases are on the rise. But they have got some real problems ahead, because first they have got to keep government funded starting in December. And then, next year, they have got new budget caps they have got to work around.

  But, right now, all the momentum is towards spending.

• John Yang:

  David, you mentioned that the economy's in good shape, the unemployment rate is low, growth is pretty strong. Is there a reason for concern about these deficits, if everything seems to be going so well?

•  David Wessel:

  Well, there's clearly no reason to worry about today's deficits, as you say, 50-year low in unemployment, inflation stable.

  I think that's why the politicians don't seem to feel the need to deal with this. And there's certainly not very much pressure from the public. The problem is in the future. If something is unsustainable, it can't go on forever.

  And every year, we're borrowing more and more money because we have promised to pay benefits to people that the current tax code will not cover. And at some point, we're going to have to do something. Some people think we will have a crisis.

  I'm not sympathetic to that view, because people have been predicting crises since you and I started covering this stuff in the early '90s. And the crisis doesn't arrive.

  But we know, from economics, that eventually this will erode the amount of — the rate of growth, and we will have lower living standards. And will be spending more and more of our tax money to pay interest on the debt, a good chunk of which will go to foreigners.

• John Yang:

  But, David, as you say, we have — you and I have been covering this for almost 30 years now. And we have sat and reported all those 30 years that something has to be done eventually.

  When — what's going to be the pressure point? You say, you don't think it's going to be a crisis, but what's it going to take to get the political incentive to do something?

•  David Wessel:

  I think that's the $4 trillion question, John.

  Look, I think the politics will change when people think the deficit is hurting them. One reason in the past Congress has had to deal with this is because interest rates have gone up a lot. So if the Fed keeps raising interest rates, if mortgage rates go up, if the Fed chair does, as Alan Greenspan used to, or Paul Volcker, lecture Congress that it's your fault because you're not dealing with the deficit, that could change things.

  And the second thing is, we could — and I don't see it on the horizon — have some kind of leadership, where some president would say, look, this isn't a problem today, it's a problem for your kids, and I want to do something about it, and would be able to sell the American people on a little belt-tightening now, so we have a better life in the future.

• John Yang:

  Lisa, what are the chances of that?

• Lisa Desjardins:

  Well, we have got a presidential election coming up. And so far, none of the Democrats running are running on the deficit. President Trump occasionally talks about it, but he's made no indication that he's interested in changing it.

  There are hard political choices. And we have got leadership questions for many issues. This is maybe toward the bottom of that very difficult stack.

• John Yang:

  Lisa Desjardins, David Wessel, thank you very much.

•  David Wessel:

  You're welcome.