The release of the proposed fiscal 2018 federal budget from the Trump Administration revealed, once again, why Washington’s annual budgets are barely worth the paper that they are written on. While the budget proclaims that it will help reduce the threat to American prosperity from the $20 trillion federal debt that was inherited from the Obama Administration, it makes broad economic assumptions that will be the undoing of this latest iteration of fiscal (mis)management from Washington.
Let’s start by looking at the assumptions made in the budget from Table S-9 Economic Assumptions found on page 45:
Let’s look at the real world. According to FRED, this is what has happened to nominal GDP growth rates since the end of the Great Recession:
Since the fourth quarter of 2009, nominal GDP has grown by an average of 3.4 percent over 30 quarters of economic expansion, well below the rates seen in prior expansions as shown here:
In addition, nominal GDP actually contracted by 3.1 percent and 3.2 percent on a year-over-year basis during the first and second quarters of 2009.
Here’s what has happened to real GDP growth since the end of the Great Recession:
Since the first quarter of 2010, real GDP has grown by an average of 2.1 percent, again, well below the rates seen in prior expansions as shown here:
During the Great Recession, real GDP contracted by as much as 4.1 percent on a year-over-year basis during the first quarter of 2009.
Not only is the assumption of economic growth rates used in the 2018 fiscal budget overly optimistic, there is one other assumption that is completely erroneous; the assumption that the economy will continue to expand without ceasing until fiscal 2027. Let’s look at a chart which shows the length of economic expansions (trough to peak) going back to the 1850s:
While I’m sure that there are those who would love to blame this on yet another Trump Administration blunder, here is a screen capture from the fiscal 2017 final Obama Administration budget showing that they made similarly erroneous assumptions on Table S-12 (page 163):
You will notice that while the budget makes no allowance for any kind of economic contraction going out to fiscal 2026, it does make somewhat more realistic assumptions when it comes to both nominal and real economic growth rates.
When one reads through government budget documents, it is always key to closely examine the assumptions used. If these assumptions do not transpire, the projections of future budgetary improvements like dropping deficit levels and improving debt accumulation rates are completely unattainable. But then again, what did you really expect from politicians?
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