US deficit widens even as economy grows

Workers at a General Motors assembly plant in Flint, Michigan on June 12, 2019. July will mark the longest economic expansion in US history.
Workers at a General Motors assembly plant in Flint, Michigan on June 12, 2019. July will mark the longest economic expansion in US history.PHOTO: AFP

WASHINGTON • President Donald Trump likes to take credit for the US economy, with its historic low unemployment and few signs of rising prices, but his promises that surging growth would pay for massive tax cuts are falling flat.

After an initial bounce last year and in the first three months of this year, the economy is expected to slow this year. And the US budget deficit is widening, the yawning gap edging closer to US$1 trillion (S$1.37 trillion) after trending downward from its peak in 2009 during the worst of the global financial crisis.

Mr Trump promised to supercharge growth to 3 per cent or higher, and claimed that the tax cuts would pay for themselves by spurring investment and employment, which in turn would yield higher tax revenue.

In fact, July will mark the longest economic expansion in US history, with continual growth since mid-2009. With a healthy economy, it is the ideal time for governments to shore up their finances and reduce debt, saving up for the next rainy day. But forecasts call for slower growth into next year - with some economists even fearing a recession - and last month the federal deficit hit a new record for May of US$208 billion, a 42 per cent increase from a year earlier.

Just eight months into the fiscal year which ends in September, the deficit is nearly as big as all of 2018, swelling to US$739 billion, US$206 billion higher than the same period last year. Even the billions in tariffs taken in during Mr Trump's multi-country trade wars have not helped. Most of the funds taken in have gone back out to aid farmers hurt by retaliation from China and others.

At the same time, government debt is expanding and is now larger than the country's annual economic output at more than US$22 trillion.

Normally, this should leave Mr Trump open to attacks from political opponents, but the Democratic Party is on the horns of a dilemma: The progressive wing of the party, including many of the two dozen presidential candidates, favour massive spending programmes.

With interest rates still very low, adherents of "modern monetary theory" believe the government can continue to borrow to finance programmes without negative consequences. Critics dismiss the theory, saying it is akin to supply-side economics espoused by the Republicans in the 1980s which argued that tax cuts would pay for themselves through higher economic output.

The last time the United States posted a budget surplus was during the economic boom under then President Bill Clinton in 1999 and 2000. Then the Iraq War started under President George W. Bush in 2003, followed by the response to the housing crash and financial crisis of 2008, pushing government finances back into the red.

Even with a steady, albeit slow, recovery for the past 10 years, the US economy is coping with an ageing population, which has pressured government finances because of rising health and retirement costs.

While government revenues grew a modest 2 per cent from October to May, total outlays jumped 9 per cent. Mr Trump's tax cuts, which mostly benefited big corporations and the very rich, reduced revenues by 11 per cent while military spending increased 13 per cent.

Since the beginning of the fiscal year, punitive tariffs on imports from China and other countries have added US$21 billion to US coffers. But the administration last year earmarked US$12 billion in aid for farmers hurt by Chinese retaliation, and another US$16 billion this year.

And while Mr Trump continues to claim that the duties are paid by China, they in fact act as a tax on US businesses and consumers, reducing profits and driving up prices.

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on June 17, 2019, with the headline 'US deficit widens even as economy grows'. Print Edition | Subscribe