The president’s budget assumes a much rosier economic outlook for the country than other government prognosticators do, translating into trillions of dollars in added revenue over the next decade.
The underlying economic assumption of the fiscal 2020 budget request is that the economy will grow this year at a robust 3.2 percent real growth rate, which is growth after subtracting the effects of inflation. That is far higher than a January forecast by the Congressional Budget Office of 2.3 percent, which is the same figure arrived at by the Federal Reserve in its latest forecast in December.
The roughly 1 percentage point disparity between forecasts continues through the next decade. The administration projects 3.1 percent growth in 2020 and 3 percent growth for each of the following four years. The CBO forecasts 1.7 percent annual growth from 2020 through 2023. The Fed predicts slightly higher growth of 2 percent in 2020, 1.8 percent in 2021 and between 1.8 percent and 2 percent thereafter.
The faster growth in Trump’s budget is projected to pay big deficit dividends: $2.8 trillion in additional revenue above the CBO’s baseline over a decade, even after assuming the 2017 tax cuts are made permanent, which the CBO does not. So if the White House economic forecasts are off and end up in line with the CBO’s, it would likely wipe out much of the proposal’s deficit savings.
The administration’s assumptions for economic growth are roughly the same as they were in the fiscal 2019 budget despite recent signs that the economy may be weakening and economists’ warnings of increasing odds for a recession next year.
The assumptions have become a little more aggressive in the area of interest rates, which is usually associated with an uptick in economic growth and inflation — and portends slightly higher debt service costs Treasury has to pay.
The 91-day Treasury bill rate, projected last year to be 2.9 percent in 2020, is forecast to be 3.1 percent. Similarly, the benchmark 10-year Treasury note, projected to pay 3.4 percent interest on average in 2020 in last year’s budget, is projected to yield 3.6 percent in the fiscal 2020 budget.
During the 2016 campaign, then candidate Donald Trump’s economic plan called for 3.5 percent annual growth. In passing the tax code overhaul, Republicans predicted much of the cost of the tax cuts would be made up by leaving behind the 2 percent growth rates of the Obama years. Instead, 3 percent growth has been portrayed as the new norm, with growth hitting 2.2 percent in 2017 and 2.9 percent in 2018.