President elect and defacto President Donald Trump campaigned on reducing government spending to eventually balance the government budget and then reduce the public debt. Last week, during Congress’ battle to pass a spending bill, Trump showed just how serious he is.
Annual deficit spending and the resulting public debt are huge problems. In 60 of the last 64 years, the federal government has spent more money than was received in tax revenue. The deficit was financed by selling government bonds. Most of the bonds mature in 10 or 20 years.
There is no plan in place to ever repay any of that debt. When a bond matures, the government simply sells new bonds to pay-off the maturing bond. Because of this, the public debt keeps getting larger.
The public debt now exceeds $36 trillion. Last year the annual interest expanse was nearly $900 billion. Because the maturing bonds carried a coupon rate of 1% to 1-1/2% and the refinanced bonds carry a rate of about 4-1/2% today, the interest expense is rapidly growing. Last year the interest expense was about 14% of total government spending.
Most economists say that if the total public debt is less than one year’s total income as measured by gross domestic product, it should not be a problem. Since annual GDP is about $26 trillion, the $36 trillion public debt is a problem.
Not only is the rapidly growing annual interest expense a problem, but with the federal government pulling that much capital out of capital markets, there could be a crowding out effect. That means there is less capital available for business and consumers. This will slow economic growth.
President Trump realizes that the first thing to do when someone is stuck in a deep hole, is to stop digging. That’s why Trump and his designees Elon Musk and Vivek Ramaswamy are so determined to really reduce government immediately.
In the past, politicians claimed they reduced government spending by simply saying they are spending less than they planned. In other words, if our elected officials submitted a budget that had a 5% increase in spending, but the politicians reduced that to a 2% increase, they claimed they reduced spending.
The Trump team will really reduce spending.
As an example, when Elon Musk purchased Twitter the social media company had hundreds of millions of users, yet it was losing money. To reduce cost, Musk eliminated about 75% of the workforce. The company became profitable, and the service stayed the same.
That’s what is needed in government.
Even before taking office, the Trump team told members of the House of Representatives not to approve the 1500 page spending bill calling for hundreds of millions of dollars in additional and unneeded spending.
Even if the government had to shut down, spending must be controlled now, they said. In the end, the government did not shut down and the spending bill was reduced to about 120 pages.
In just a few weeks, Trump will officially be sworn in as the 47th President of the United States. Along with the other policies that he will implement immediately, Musk and Ramaswamy will take a sharp knife to government spending. They will not just slow the growth they will really cut spending.
As soon as possible, Trump will move to cut taxes. The supply-side oriented tax cuts will reduce tax rates for nearly all households and business. That coupled with the elimination of counter-productive regulations will increase economic growth. The result will be an increase, not a decrease, in tax revenue.
Higher tax revenue with less government spending will lead to a balanced budget, and then a surplus which will be used to reduce the public debt.
President Reagan did this in 1982. Tax rates were cut and tax revenue increased. But primarily because of needed increases in defense spending the budget was never in balance.
President Clinton used this policy in 1996. He reduced the capital gains tax rate from 28% to 20%. This supply-side tax cut resulted in economic growth increasing by 4% per year for the next four years. After declaring, “The era of big government is over,” he worked with Speaker of the House Newt Gingrich to reduce government spending.
The result was four years of budget surpluses. This is exactly what Trump will do.
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Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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