President Trump released his $4.1 trillion fiscal year 2018 budget request today. Here are five things to know about it.
 
1.The budget is not dead… yet*
Declaring a President’s budget “dead on arrival” is customary in Washington. Trump’s budget already has its share of critics who have declared it deceased. Indeed, an argument can be made that this budget is deader than most for several reasons, ranging from policy proposals that will find little support in Congress, to unrealistic economic growth assumptions, to the President’s own political difficulties, which will be an albatross around his neck as he attempts to navigate his proposals through Congress.
 
Then why is this budget not completely dead?
 
This budget includes many specifics about what federal agencies plan to accomplish in the coming fiscal year. While many policy proposals, especially those caught on the political radar, ultimately won’t be accepted by Congress, many others that fly under the radar and are fundamental to agency missions will move forward in some form.
 
Examples of low-key, but important, budget details include funding for information technology modernization (including cybersecurity), research and development, financial management improvements, and security for public buildings and overseas embassies. The budget also shapes the day-to-day management of agencies, such as the hiring and training of those who work directly with the public.
 
The House and Senate Appropriations Committees will dive into this budget minutia to inform funding decisions over the coming weeks. The big political controversies will still be important – and could very well contribute to the budget’s obituary – but there are many budget details that are critical to writing spending bills that will be used during the congressional appropriations process.
 
2.$54 billion in cuts to nondefense discretionary programs won’t happen
Discretionary programs represent the nuts and bolts of government operations. They include national defense, homeland security, federal law enforcement, weather forecasting, NASA, Corps of Engineers flood control and harbor dredging, financial management by the Treasury Department, maintenance of national parks and recreation areas, support for energy development, biomedical research, veterans medical care, air traffic control, and many other activities critical for national productivity.
 
Yet discretionary spending is just one-third of all federal government spending, and the portion of discretionary spending that excludes defense activities is only one-sixth.
 
The President’s budget proposes to reduce the fiscal year 2018 nondefense discretionary spending caps by $54 billion. This will hit programs that have significant public support and bipartisan support in Congress.
 
The National Institutes of Health would be cut $5.6 billion below current levels, considerably slowing progress in biomedical research. The State Department and other international programs would be slashed by $11.5 billion or 29.1 percent – Defense Secretary James Mattis declared in 2013, “If you don’t fund the State Department fully, then I need to buy more ammunition ultimately." There is strong support in the defense and intelligence communities for using foreign aid and diplomacy as tools to promote the peaceful resolution of conflicts.
 
Elimination of funding for the Low-Income Home Energy Assistance Program and the Community Development Block Grant program will also face fierce bipartisan opposition. Likewise, termination of the National Endowment for the Arts, while saving a relatively small amount of money, will stir up a hornet’s nest of grassroots opposition.
 
A large reduction ($2.6 billion or 31.4 percent) to the Environmental Protection Agency is also unlikely to be approved, even though congressional Republicans successfully cut this agency in recent years. Substantial reductions to EPA programs such as the cleanup of the Chesapeake Bay and the Great Lakes have been panned by Republicans and Democrats alike.
 
Congress has the power of the purse, and Congress will exercise that power to reject or modify most of these cuts. Some savings in specific programs are possible but don’t expect to see anything close to the savings proposed in the budget. Overall nondefense discretionary spending will likely end up closer to current levels rather than be subject to massive cuts.
 
One additional note – to further complicate the nondefense discretionary outlook, the budget includes a $200 billion placeholder in 2018 for the Administration’s infrastructure initiative. This type of spending is usually nondefense discretionary, but the budget places it outside of the discretionary totals and offers little detail pending the Administration’s development of infrastructure policy.
 
3.Defense is a winner – but by how much?
The budget would increase spending for national defense by $54 billion above the current defense spending caps. This would effectively reverse the effect of the 2013 sequester for defense. Included in this budget is money for major defense programs such as fighter aircraft and shipbuilding, as well as for increases in manpower and improvements in operational readiness.
 
In spite of this increase, this defense budget is not “one of the largest increases in national defense spending in American history” as promised by President Trump in February. As reported by DefenseNews, the defense increase is only the ninth largest such increase in the last forty years. Further, the budget is only about 3 percent higher than what was envisioned in the last Obama budget.
 
Defense funding enjoys strong bipartisan support. It’s expected that Congress will approve some increase to defense in 2018. But one unknown is how final decisions on the defense budget will be affected by other budget considerations. The increase for defense spending is offset with large cuts to nondefense programs, as described earlier. Since these nondefense cuts are unlikely to occur, there may be more pressure to contain overall discretionary spending by being more prudent with defense spending.
 
There is also the matter that the spending caps that are currently mandated by the Budget Control Act. This law would have to be amended In order for a $54 billion increase in the cap to take effect. Otherwise, another sequester would occur and reduce spending to the capped level.
 
A change in law would likely need to come from a broader budget agreement between Congress and the President – one that could include lifting both the defense and nondefense caps, as well as possible changes to entitlement programs and tax policies. Many Democrats will demand spending parity – an increase in nondefense spending equal to the increase in defense spending – as the price for their support. The complexities of negotiating such an agreement are daunting, and there is not yet any sign that Congress and the Administration are ready to start talking.
 
Another element of the defense budget is funding for “Global War on Terrorism/Overseas Contingency Operations” (GWOT/OCO). This is primarily funding for operations in Afghanistan, Iraq, and Syria, and this funding is not constrained by the defense cap. The President’s budget assumes a $593 billion savings in GWOT/OCO over ten years. The funding requirements in this area are highly unpredictable and also have an impact on how Congress develops the base defense budget.
 
4.The budget won’t be balanced in ten years
The President’s budget asserts that the federal budget deficit will be eliminated by fiscal year 2027. The Congressional Budget Office (CBO) estimated in January that, without any policy changes, the deficit would grow from $587 billion in fiscal year 2016 to $1.4 trillion in fiscal year 2027. How does the budget manage to close that gap?
 
Spending cuts make up a large part of deficit reduction in this budget. As described earlier, the proposed cuts to discretionary spending are unrealistic. In addition, the major reductions to entitlement/safety net spending (such as cuts of more than $600 billion to Medicaid and $192 billion to food stamps over ten years) are unlikely to be approved, making the path to balance difficult.
 
Also implausible is the Administration’s assumption of annual economic growth, which would rise to 3 percent by 2021 and remain at that level through 2027. This figure is well above what most economists believe is possible even in their most optimistic scenarios. The Wall Street Journal reported that economists it polled believed that the President’s policies could increase growth by about 0.3 percent – to about 2.3 percent.
 
By building into its budget an improbable growth assumption and austere levels of spending for popular programs, the Administration makes it much easier to hit, on paper, its target of balance by 2027. However, reality will be much different. And, the House and Senate Budget Committees may follow suit by writing budget resolutions that assume balance in ten years. They will have to face the same reality checks as the President.
 
5.This fall will be interesting… in a scary sense
Fiscal year 2018 begins in a little over four months. Due to the transition to a new Administration and other factors, the budget request is 106 days late (the budget is supposed to be sent to Congress by the first Monday in February). Last year, the Appropriations Committee in the House of Representatives started work on its first spending bill on March 23. This year, no appropriations subcommittee has yet considered a bill.
 
The House and Senate Appropriations Committees don’t even have top-line discretionary numbers to hit yet. That number is supposed to come from the congressional budget resolution, and the Budget Committees won’t develop a budget resolution until after they have had a chance to look at the President’s budget. The Appropriations Committees could get started by using the discretionary cap numbers under the Budget Control Act, but those numbers are vastly different from the President’s budget and, quite possibly, will be different from the budget resolution’s numbers by similar amounts. These differences will make the Committees’ job much harder.
 
None of this bodes well for getting funding enacted by the September 30 deadline. There will need to be a continuing resolution in September in order to extend current funding and keep basic government functions operating. However, the Trump Administration, including the President himself, recently made remarks suggesting that a government shutdown could be acceptable. We will need to wait until this drama unfolds in September to see how serious they are, but a shutdown threat is real.
 
A shutdown is not the only fiscal mess that could emerge later this year. The federal debt ceiling has been hit, and the Treasury is currently using “extraordinary measures” to manage cash. The Secretary of the Treasury wants Congress to address the debt ceiling before it becomes a crisis, preferably before Congress’ August recess. But the politics of debt ceiling extensions are exceptionally difficult, and the matter could easily slip to September or later. The Treasury currently estimates that it will run out of its ability to use extraordinary measures by early fall.
 
So, this fall there will be a threat of a government shutdown, possibly an actual shutdown, and potentially a debt limit crisis. And all this will happen as Congress and the Administration continue to be distracted by other matters, including the continuing investigation into links between Russia and individuals associated with the Trump campaign.
 
Hold on to your hats – it’s going to be a wild ride.
 
 
* Apologies to Monty Python.

The President’s fiscal year 2018 budget is expected to be sent to Congress on May 23. This budget will include a lot of detailed information that was not present when the President released his so-called “skinny budget” on March 16.

The skinny budget focused entirely on just one-third of federal spending: “discretionary,” or annually funded, programs. For that one-third, the budget provided scant details, although notably it proposed a $54 billion increase in defense spending, together with a $54 billion reduction in non-defense discretionary spending.

The budget released on May 23 will present much more of the budgetary nuts and bolts that most budget observers want to see. It will show the President’s policy proposals for taxes and other revenues, as well as for entitlement and other “mandatory” programs – these programs include Social Security, Medicare, Medicaid, income security programs such as unemployment compensation and the Supplemental Nutrition Assistance Program (food stamps), and many others.

The budget will show account-by-account information for discretionary programs, including specific appropriation proposals and detailed budget estimates. Also, soon after the budget is released, government agencies will release even greater detail for programs under their purview. The agencies’ “congressional budget justifications” will be a valuable resource for anyone who closely follows a specific agency or program, and they will be available on agency websites (assuming the new Administration follows past practice).

We will have to wait to see this greater level of detail. But from now until the budget is released, you should expect to hear more and more news reports about what the budget will propose. These will include details that the Administration will selectively release in order to try to guide public opinion on the budget.

For example, there are reports that the Administration will seek to achieve a balanced federal budget in ten years. Is this a realistic goal?

In January, the Congressional Budget Office (CBO) estimated that, without any policy changes, the federal deficit would grow from $587 billion in fiscal year 2016 to $1.4 trillion in fiscal year 2027. This would occur in spite of $1.9 trillion in annual revenue growth – growth which will be overwhelmed by $2.7 billion in increased spending, mainly in mandatory spending programs.

Closing that budget gap by 2027 would take a Herculean effort. Indications are that the Administration will seek $800 billion in mandatory spending cuts over ten years. However, two of the biggest drivers of mandatory spending growth – Social Security and Medicare – are likely to be protected from the chopping block (although there are reports that reductions may be proposed in the Disability Insurance program of Social Security).

The budget is also likely to include tax reform proposals, including cuts to certain tax rates. These cuts could swell the deficit even further – even though the Administration could assume extremely robust economic growth due to its tax changes, trade policies, and deregulation. During the campaign, candidate Trump claimed that his policies would “conservatively boost growth to 3.5 percent per year on average,” and could possibly hit 4 percent growth.

CBO forecast 1.9 percent average annual economic growth in its January report. Some economists believe that growth over the next ten years approaching 3.5 to 4 percent is next to impossible since labor force growth will continue to be constrained due to the retirement of baby boomers, and productivity growth is unlikely to be strong enough to make up the difference.

Nevertheless, look for the budget to assume substantial average annual economic growth – well above 3 percent – in order to achieve balance by 2027. This growth assumption will be the target of much debate.
​
In the Reagan era, the term “rosy scenario” was coined for overly optimistic economic forecasts. As an analyst at the Office of Management and Budget during part of that era, I would sometimes hear someone say: “I know Rosy – she’s a good friend of mine.” Rosy is much older now, but she’s still very popular.

​It’s only May, and there is already chatter about a federal government shutdown in the fall.
 
President Trump tweeted recently – “Our country needs a good ‘shutdown’ in September to fix mess!”
 
Office of Management and Budget Director Mick Mulvaney doubled down on his boss’ words, saying – “The appropriations, the spending process, Congress using the power of the purse has been broken here in Washington for more than ten years. And I think a good shutdown would be one that could help fix that.”
 
This kind of talk is unfortunate and counterproductive. A government shutdown is a disruptive and costly proposition, as past shutdowns have clearly demonstrated. The 16-day shutdown in October, 2013 (fiscal year 2014) caused significant losses in the nation’s economy, halted many government programs and services, kept workers from performing their jobs, delayed federal payments on contracts, prevented collections of fees and other revenues due the government, and caused avoidable costs across the government.
 
Standard & Poor’s estimated the economic cost to the nation of the 2013 shutdown to be $24 billion. The White House Council of Economic Advisers estimated that private sector job growth slowed by about 120,000 jobs during the shutdown. About 6.6 million federal employee work days were lost, according to the Office of Management and Budget.
 
Federal employees were not the only workers who suffered. Federal contractors furloughed thousands of employees. Federal employee salaries were eventually made whole; most furloughed private sector employees were never paid for lost days.
 
Small businesses suffered. Entrepreneurs dependent on a local federal presence, such as tourism-based enterprises operating near a national park or recreation area, lost sales. Janitorial companies on contract to work in federal buildings couldn’t do their jobs. The Small Business Administration couldn’t process or approve new small business loans, stalling a critical driver of economic activity.
 
Director Mulvaney believes that all this could be a cure for the budget problems in Washington. He’s wrong. Another federal government shutdown would be as harmful and costly as prior shutdowns, and it would only deepen Americans’ cynicism and belief in Washington’s dysfunction.
 
Shutdowns are not hard to avoid. If Congress’ work on appropriations is not complete by the beginning of the fiscal year, Congress can pass a simple continuing resolution – continuing current funding levels and policies into the new fiscal year – to allow more time to finish. Maintaining the status quo with a short-term continuing resolution doesn’t have to be controversial.
 
Unfortunately, politicians with their own agendas use continuing resolutions as political footballs, leveraging the threat of a shutdown to try to get what they want. This comes at great expense and is entirely avoidable, but it takes political will and the common sense to recognize the damage shutdowns can cause.