The Priorities of the 2020 Presidential Budget

The recently released Presidential budget for fiscal 2020 clearly provides us with a list of the priorities of the current administration.  Let's look at some of the details.

Here is a graph showing the proposed budget (in billions of dollars) for all of the federal government departments and some key agencies:

Here is a graph showing the year-over-year changes in the budget for each federal government department, again in billions of dollars:

Here is a graph showing the year-over-year percent changes in the budget for each federal government department:

As you can see, the White House has prioritized Defense, Homeland Security and Veterans Affairs by increasing their budget allocations, whereas socially important departments with larger budgets like Health and Human Services and Education have seen their allocation of tax dollars reduced by 12 percent or a total of $20.4 billion.  In the case of Health and Human Services, the budget for 2020 proposed $1.248 trillion in mandatory health savings as a mean to reduce long-term deficits.  

On an overall basis, here is what is expected to happen to the deficits over the next 10 years:

Here is a table showing receipts, outlays and the debt and deficit over the next 10 years as well as the size of the economy (not allowing for any recessions):

Note that the debt held by the public-to-GDP ratio does not project any recessions over the period from 2019 to 2029, a highly unlikely scenario.  As well, debt held by the public is only part of Washington's debt; according to this Debt Position and Activity Report from the Treasury Department shows that the total debt is $22.115 trillion and is made up of $16.25 trillion (73.48 percent) in debt held by the public and $5.864 trillion (26.52%) in intergovernmental debt:

When both factors are taken into account, it suggests that Washington's total debt will significantly exceed 100 percent over the next decade.  As well, there could be significant negative impacts to the economy as Washington's federal debt grows past the comfort zone of investors who will expect higher returns on what they may deem as riskier debt, a factor that will put upward pressure on debt servicing costs and, ultimately, the debt and deficits.

Let's close with this interesting excerpt from the Department of Defense section of the budget:

"The Budget fully supports the U.S.-Israel Memorandum of Understanding and includes $3.3 billion in Foreign Military Financing grant assistance to bolster Israel’s capacity to defend itself against threats in the region and maintain its qualitative military edge."

It's interesting to see that Israel still benefits from Washington's beneficence even as American taxpayers are expected to make do with less.  No one doubts that there is a lot of waste in government but, a department with a proven track record of waste, still accounts for the lion's share of the total funds being spent by the federal government.

The Biggest Fallacies of Washington's Budgets

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:

You may not notice the weakness in these assumptions immediately, however, if you look at the line showing the year-over-year percent change in nominal GDP you will notice some very optimistic projections.  The budget assumes that nominal GDP will grow by between 4.3 percent and 5.1 percent between fiscal 2017 and fiscal 2027 and that real GDP will grow by between 2.3 percent and 3.0 percent over the same timeframe.

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:

The longest trough to peak was 120 months during the expansion which began after the March 2001 to November 2001 recession. Over the period from 1854 to 2009, there were 33 economic cycles with an average trough to peak duration of 38.7 months.  As far as the latest economic cycle goes, we are now 95 months into the expansion and if the assumptions used in the fiscal 2018 budget hold, the economic expansion will be a whopping 222 months long, nearly double the longest expansion in the past century and a half.

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?  

What Americans Want From Their Government and What They Are Getting

With the Trump Administration boosting spending on defense and cutting spending on other discretionary line items and the fact that Washington has once again hit the latest debt ceiling, a recent poll by Morning Consult and Politico provides us with an interesting snapshot of where American taxpayers want their hard-earned dollars spent.  The poll was conducted on March 16 to 19, 2017 with a national sample of 1927 registered voters and the results were weighted to correct for race/ethnicity, gender, educational level and region.

Let's open with this question to give us a sense of what issues are most important to American voters:

"Thinking about your vote, what would you say is the top set of issues on your mind when you cast your vote for federal offices such as the U.S. Senate or Congress".

Among all voters, the result was as follows:

Economic Issues - 29 percent

Security Issues - 20 percent

Health Care Issues - 18 percent

Senior's Issues - 14 percent

Education Issues - 7 percent

Women's Issues - 5 percent

Energy Issues - 3 percent

Obviously, the current economic situation in the United States is quite important to American voters, particularly given the long-term joblessness of millions of former workers followed by security and health care issues.  

With that in mind, let's skip to the section of the poll that covers government spending options and look at the areas that are of greatest concern to American voters.  Here is the question asked by Morning Consult:

"Please indicate if you think the government should be spending more, spending less or spending about the same amount as it currently does for each of the following:"

1.) National Defense/Military:

More - 51%

Less - 18%

About the same - 22 percent

Don't know/No opinion - 9%

A slight majority of those polled believed that the U.S. government should be spending more on the military and national defense.   Here is a screen capture showing how Donald Trump is doing just that:

It is interesting to see that, in Donald Trump's proposed discretionary budget for fiscal 2018, defense spending will consume 56.6 percent of the total budget. 

2.) Military Aid to Other Nations:

More - 16 percent

Less - 52 percent

About the same - 21 percent

Don't know/No opinion - 11 percent

The United States actually invests significantly in military operations in other nations; in fiscal 2015, a total of $5.647 billion was spent on foreign military financing, over half of which was spent on funding Israel's military machine ($3.1 billion).  That said, the $5.6 billion in foreign military aid is rather insignificant compared to the total Department of Defence proposed budget of $582.7 billion for fiscal 2017.

3.) Health Care:

More - 58 percent

Less - 15 percent

About the same - 16 percent

Don't know/No opinion - 11 percent

Let's start by looking at the Trump budget's proposed spending on Health and Human Services as shown here:

An overwhelming majority of Americans believe that more needs to be spent on health care; despite that, Donald Trump proposes to cut spending on Health and Human Services by $15.1 billion or 17.9 percent to $69 billion.  

Now, let's look at non-discretionary spending on health care in America.  According to the Centres for Medicare and Medicare Services (CMS), National Health Expenditures (NHE) grew to $3.2 trillion in 2015, up 5.8 percent from the previous year, accounting for a whopping 17.8 percent of GDP.  Medicare spending totalled $646.2 billion and Medicaid spending grew to $545.1 billion.  NHE is expected to grow at an average rate of 5.6 percent per year over the decade from 2016 to 2025, rising to 19.9 percent of GDP by 2025.  Here is a graphic showing proposed spending on Medicare and Medicaid for the period between 2015 and 2017:

  

According to the CMS, Medicare outlays will grow from $695 billion in fiscal 2016 to $1.3 trillion in fiscal 2026 and the average monthly enrolment will expand from 57 million beneficiaries in fiscal 2016 to 75 million in fiscal 2026.  Congress and the Oval Office will have little choice in the matter with an aging population; either spending will have to rise or services will have to be cut. 

4.) Education:

More - 60 percent

Less - 13 percent

About the same - 17 percent

Don't know/No opinion - 9 percent

Again, an overwhelming majority of Americans believe that the government needs to spend more on education.  That said, Donald Trump's budget proposes that $9 billion or 13 percent be cut from the Department of Education, bringing the budget down to $59 billion as shown here:

Obviously, there is a significant difference in priorities between Donald Trump and American voters when it comes to education unless, of course, you want your child to attend a charter school. 

Both Donald Trump and American voters have made their priorities quite clear; while they both generally agree on the big ticket item, defense, there is significant disagreement on education and at least one aspect of health care.  As well, with rising spending on mandatory Medicare and Medicaid required over the coming decade at the same time as the debt passes the $20 trillion mark like it doesn't even matter, American voters will soon find that they cannot have their cake and eat it too.  Something will have to give.

A History of Fiscal Mismanagement in Ontario

With the Wynne government delivering its 2015 - 2016 budget, the second in its short history, the time seemed right to update an older posting that I had written on Ontario's rather dodgy-looking fiscal picture.

Let's start with a look at which individuals and political parties have ruled in Ontario since 1985:

1985 - 1987  David Peterson - Liberal (minority)

1987 - 1990  David Peterson - Liberal

1990 - 1995  Bob Rae - NDP

1995 - 1999  Mike Harris - Progressive Conservative

1999 - 2002  Mike Harris - Progressive Conservative

2002 - 2003  Ernie Eves – Progressive Conservative

2003 - 2007  Dalton McGuinty - Liberal

2007 - 2011  Dalton McGuinty - Liberal

2011 - 2013  Dalton McGuinty - Liberal (minority)

2013 to present  Kathleen Wynne – Liberal

The fiscal data for this posting was sourced from the TD Bank which provides a history of both fiscal balance and debt levels for all provinces and the federal government.

Let's start with a table showing Ontario's debt, surplus and deficit and debt-to-GDP history since 1986:

Here is a bar graph showing Ontario's surplus and deficit history since 1986:

It's quite apparent that Ontario governments have a severe spending problem.  Of the last 30 fiscal years, Ontario's budget has been in surplus only eight times or 26.7 percent of the time and in deficit twenty-two times or 73.3 percent of the time.  The surplus has ranged from a minimum of $90 million in fiscal 1989 - 1990 to a maximum of $2.269 billion in fiscal 2006 - 2007.  The total surplus over the eight years is only $6.319 billion for an average of $789.9 million  in each of the eight years.  In contrast, the deficit has ranged from a low of  $1.479 billion in fiscal 1988 - 1989 to a high of $19.262 billion in fiscal 2009 - 2010.  The total deficit over the twenty-two years is $175.2 billion for an average of $7.96 billion in each of the 22 years.  It is interesting to see that the average deficit over the 30 year period is higher than the total surplus over the eight years that the Ontario government spent less than it brought in as revenue.

Now, let's look at a graph that shows the growth in Ontario's debt since 1986:

Over the past three decades, Ontario's net debt has grown by $235.7 billion or 748.3 percent.  In fiscal 2013 - 2014, Ontario's provincial debt was $267.2 billion, putting it in first place among all provinces with Quebec in second place at $181.3 billion.  According to Statistics Canada, Ontario's population in 2014 was 13,678,700; this puts Ontario's per capita debt at $19,535.  By way of comparison, Quebec's population in 2014 was 8,214,700; this puts Quebec's per capita debt at $22,070.

Lastly, let's look at what has happened to Ontario's debt-to-GDP ratio since 1986:

You'll notice that since fiscal 2008 - 2009, Ontario's debt-to-GDP ratio has climbed quite rapidly, similar to what happened in the early 1990s although, at that time, the debt-to-GDP was at a much lower level.  The debt-to-GDP level has risen by 10.3 percentage points since 2008, a trend that is quite worrisome.  While the debt level as a percentage of the economy isn't as high as in many national jurisdictions around the world, Ontario also has more limited ability to tax its residents to make up for the shortfall.

While it was quite understandable that Ontario's spending would exceed its revenue during and immediately after the Great Recession, it is quite concerning that a succession of provincial governments seem unable to achieve anything close to fiscal balance.  Historical precedents indicate that the global economy is quite likely to experience a contraction over the next two or three years, a situation that will make it increasingly unlikely that Ontario (and other overly indebted provincial jurisdictions for that matter) will achieve a balanced budget, no matter what they may try to tell taxpayers.