Fiscal BS Alarm Has Been Triggered

The growth assumption in the House Budget Resolution is absurd.

As the Republican budget process gets underway—this is the process by which they will extend the Trump tax cuts, many of which expire this year—we’re going to be seeing a lot of Robin Hood in reverse along with the subject of this short missive: phony assumptions.

The CRFB reports the following (my bold):

The budget resolution assumes $2.6 trillion of macroeconomic feedback, which press reports have indicated is a result of boosting average annual growth to 2.8 percent from a projected 1.8 percent.

Now, the lion’s share of what they’re proposing is extending the Trump tax cuts, at a cost of over $4 trillion. Even if you don’t like or think we need this extension, you may be thinking, “surely that’s enough to bump up the growth rate, maybe not a full percentage point, but something noticeable.”

Nope. Your best guess should be for the extension to have about zero impact on growth.

Why? Because, in technical terms, it generates no new fiscal impulse. In plain terms, it doesn’t change anything in terms of what people are already paying or not paying in taxes. It’s an extension of a bunch of tax parameters that have been in the economy since the TCJA took effect in 2018.

Hold up, you might be thinking. If it doesn’t change anything in the real economy, then how can it boost the deficit that much?

Because it was supposed to expire this year. So, when the CBO and other budget scorekeepers thought about how much revenues were expected post-’25, they included trillions from the expiration of the Trump cuts. It budget language, those higher revenues were in the baseline.

In this sense, the extension delivers the worst of both worlds. You get no new fiscal boost on the growth side, but it pumps up the deficit by trillions (they’ve got some offsets; that’s the Dooh Nibor part; see CRFB link).

They’ll have some new tax cuts in there, and those will generate new fiscal impulse, but the magnitude of those new revenue losses will be a sideshow to the TCJA extension, and I don’t think you’ll find an economist who’s not be paid to believe otherwise agree that there’s a full extra percent of real GDP growth in there.