Donald Trump wants to reprise the past, making America great again. When it was last great is an open question.
Trump’s pick for the next Treasury secretary, Scott Bessent, seems to have a date in mind with regard to the federal deficit. He plans to slash deficits to the levels of 2015, when Barack Obama was president.
Bessent, a hedge-fund manager, espouses a “three arrows” approach toward overseeing the US economy: reducing federal deficits to 3% of GDP, boosting annual growth to 3%, and producing an additional 3 million barrels of oil domestically each year. Each goal is challenging, perhaps quixotic.
Deficit reduction may be the toughest of the three. The federal deficit hit $1.8 trillion in fiscal year 2024, which ended Sept. 30. That was 6.4% of GDP. The last time the deficit came in under 3% of GDP was in 2015, Obama’s seventh year in office.
During Donald Trump’s first three years in office, the deficit averaged 4% of GDP. Including 2020, when Trump signed massive amounts of debt-financed COVID relief into law, the Trump deficits were 6.6% of GDP.
Under Biden, deficits have averaged 7.6% of GDP, including large amounts of COVID relief Biden signed into law in 2021. On the whole, deficits have grown increasingly larger under every president of the last 23 years, with big jumps when Congress passed large stimulus programs during the financial panic of 2008 and 2009 and during COVID in 2020 and 2021.
Bessent has criticized Biden for running large deficits and financing them inefficiently, but he’ll soon discover there’s no easy way to do it better. Deficits aren’t rising inexorably because one president or another pads the budget with extravagant goodies. They’re rising because of spending growth in federal programs that are on autopilot and distribute money to everybody with a legitimate claim.
This mandatory spending includes Social Security, Medicare, Medicaid, interest on the debt, antipoverty programs such as food aid, and a variety of lesser programs. These are sometimes called “entitlement programs” because the beneficiaries are entitled to the benefits by law.
President-elect Donald Trump listens as investor Scott Bessent speaks on the economy in Asheville, N.C., Aug. 14, 2024. (AP Photo/Matt Kelley, File) ·ASSOCIATED PRESS
Mandatory spending accounted for 34% of all federal spending in 1965. It has more than doubled to 73% of all federal spending today, according to budget expert Brian Riedl of the Manhattan Institute. The growth in Social Security, Medicare, and interest spending, in particular, will be the main things pushing future deficits even higher.
Bessent says he’ll target cutbacks in “discretionary spending,” not including the defense budget, to help lower the deficit while rescinding some of the green energy tax breaks Biden signed into law. Congress would have to enact those changes through new legislation.
If it happens, it will scarcely dent the annual deficit. Discretionary spending, which includes stuff like veterans’ benefits, education assistance, highway funding, and medical research, only accounts for 14% of federal outlays. A 10% cut in all that spending — which would be draconian by congressional standards — would only lower the deficit from 6.4% of GDP to 6.1%. Cutting all of it would bring the deficit all the way down to around 3.2% of GDP but also grind transit to a halt, tank the economy, and enrage legions of Americans.
Congress is also unlikely to cut defense spending, which is relatively low on a historical basis, and might need to go higher given the warlike aims of Russia, China, Iran, and North Korea.
The point of this tedious budget math is that nobody is going to make a meaningful dent in deficits and the debt unless they tackle runaway growth in Social Security and Medicare spending, which is known as the "third rail of politics" for a reason. These are cherished programs that benefit the most highly engaged group of voters. Messing with them is political suicide, which is why Trump, like most other politicians, promises not to touch them.
Trump and his team have the added problem of vowing to extend tax cuts expiring at the end of next year while cutting other taxes such as the ones on tips and Social Security income.
Trump could make up a bit of the lost revenue with new tariffs on imports, and Congress could cancel Biden’s tax credits for people who buy electric vehicles. On the whole, however, Trump is set to add trillions of dollars to future deficits. The odds are high Trump will leave office with deficits at a higher portion of GDP than they are under Biden, not a lower level.
Bessent might argue that boosting economic growth to the 3% range would bring in more tax revenue to help lower deficits. Yet we’re almost there. Real GDP growth during the last two years has averaged 2.7%, and deficits have risen anyway. Biden critics argue that growth has only been strong during his presidency because of lingering COVID stimulus. Yet the debt-financed tax cuts Trump is proposing, again, are just a different form of stimulus.
Nor is it clear Bessent will get his extra 3 million barrels of oil. Fossil fuel firms certainly like Trump’s deregulatory agenda, but they also like the profits that come with moderately high oil prices, and they’re not likely to boost supply if it dents profits.
The economy can still prosper under Trump, even if Bessent’s 3-3-3 plan turns out to be more like 6-2-1. But oh, the irony. Back in 2015, when the annual deficit was 2.9% of GDP, Obama’s Republican critics blasted him as the most fiscally irresponsible president in US history. Now the aim is to match Obama’s fiscal performance, and that is probably wishful thinking.
