Deficits usually decrease during periods of economic growth as household income, corporate profits and capital gains all increase, the Wall Street Journal explained in a report published Monday. However, in the last fiscal year, interest payments on the federal debt and military spending increased to a great extent, and the Republican tax cuts championed by US President Donald Trump failed to boost productivity enough for tax income to keep up with government spending.
Financial policy analyst Daniel Sankey joined Radio Sputnik's Loud & Clear Tuesday to discuss the biggest one-year increase in the US national deficit since 2012.
"The federal deficit has grown larger than it has in the last six years. The Wall Street Journal is pointing out that it may have something to do with the GOP tax plan, which was passed recently. And that's certainly the case. When there is economic expansion, we see an increase in revenue because there is all this increased profitability, and tax revenue flows in. And that, of course, is what Donald Trump promised: [that] these tax cuts are going to pay for themselves and then some," Sankey explained.
In December, Trump signed a bill stipulating big tax cuts for business enterprises and smaller ones for individuals, including middle class and low-income families, in an effort to boost the US economy and bring money back to the country. The bill slashed tax rates for business enterprises from 35 percent to 21 percent, marking the first major tax overhaul in the US since the 1980s. Now, many Democrats are pointing to the tax cuts as the cause of the growing national deficit.
"A deficit of this magnitude in an economy this strong is historically unprecedented," Jason Furman, chairman of the Council of Economic Advisers in the Democratic administration of former US President Barack Obama and an economics professor at Harvard University, recently told the Wall Street Journal.
"Undertaking permanent fiscal stimulus [through tax cuts] at this stage of the economic expansion is contrary to all sound tenets of economic policy," he added.
According to Sankey, what we are seeing is a new economic phenomenon, which involves shrinking revenues in the midst of an economic boom cycle, which is quite uncommon. There are two main reasons for this phenomenon, Sankey argues: the massive GOP tax cuts and the steep increase in military spending.
"The first thing is that the GOP tax cuts were so significant, so immense and reduced tax revenues so severely that even though there is an increase in profitability, it still can't make up for the fact that there are huge tax cuts. That's a huge part of it," Sankey explained.
"Secondarily, is the military spending. We recently passed a multi-billion dollar spending budget, and this was a bipartisan effort that was almost unanimously supported by both parties. We [the US] are spending an immense amount of money on the military. And it has been for the benefit of war contractors and at the detriment of our own civil society, that is running out of money because we are pouring so much in this military budget so we can go overseas and bomb women and children in foreign lands. So, both of these are causing the deficit to swell even in the midst of an economic upturn. So it's a very unique phenomenon right now that we're observing," Sankey added.
In August, the US Congress approved a $717 billion defense policy bill that would raise military pay by 2.6 percent, the highest pay increase in nine years. The bill also funds the Trump administration's request for $6.3 billion for the European Deterrence Initiative (EDI) to further increase the number of US troops in Europe and deter what it calls "Russian aggression." The bill, in addition, prohibits military-to-military cooperation with Russia.
Economic deficits often cause the government to privatize publicly owned services, Sankey explained, because the government claims it can no longer afford public schools or healthcare programs like Medicaid.
"For some reason, we can afford the hundreds of billions of dollars for the military. [However], Medicaid and education that promote human life, as opposed to destroying it, are always on the chopping block. You cut spending on, say, education, and then class size grows, teachers are more overwhelmed, more under resourced, and then you start complaining that the teachers and schools are terrible and that all these publicly owned services need to become privatized because they're so inefficient," Sankey told Sputnik.
"These public services are public, in part, because they're necessary. The end goal [of our government] is to take these publicly owned institutions that provide for our community and make them private so people like [US Secretary of Education] Betsy DeVos can make huge profits at the expense of many people," Sankey added.