House Budget Resolution: Balancing Tax Cuts and Spending Reductions
The House Budget Committee has unveiled a budget resolution outlining significant reductions in both taxes and spending over the next ten years. This resolution sets the stage for extending expiring provisions of the Tax Cuts and Jobs Act (TCJA) and potentially implementing further tax cuts. Given the Republican’s narrow majority in the House, achieving this will require nearly unanimous support within the party.
Deficit Targets and Spending Cuts
The resolution aims to limit the deficit increase from tax cuts to $4.5 trillion over the next decade. It mandates at least $1.2 trillion in spending cuts and sets a goal of $2 trillion in mandatory spending reductions. Failure to reach the $2 trillion goal would necessitate a reduction in the tax cut cap. These measures are projected to increase the budget deficit by between $2.5 trillion and $3.3 trillion over the budget window, before accounting for potential economic growth impacts.
Targeted Spending Reductions
Specific House committees are tasked with achieving these spending cuts. The Energy and Commerce Committee faces the largest reduction target ($880 billion), followed by the Education and Workforce Committee ($330 billion), and the Agriculture Committee ($230 billion). Programs like Medicaid, student loan relief, and the Supplemental Nutrition Assistance Program (SNAP) are likely to be affected. Conversely, the Judiciary, Armed Services, and Homeland Security Committees are authorized to increase spending by a combined $300 billion, likely earmarked for immigration and defense.
Economic Growth Goals
The House resolution sets an ambitious target of 2.6 percent annual real economic growth. Achieving this will require focused efforts on pro-growth reforms, not only in taxes and spending but also in regulations and other policy areas. In the tax realm, this suggests prioritizing reforms with the highest potential for long-run economic growth per dollar of revenue lost, such as expensing for capital investment and simplifying the tax code.
Rationale for Linking Spending and Tax Reform
Connecting spending reform to this year’s tax reform efforts offers several advantages:
- Containing Spending Growth: Spending has significantly outpaced inflation in recent years and is projected to continue this trend, reaching levels historically seen only during major crises. Mandatory spending and interest on the debt are the fastest-growing budget components.
- Minimizing Economic Harm: Spending cuts are considered less economically damaging than other methods of deficit reduction, such as tariffs or income tax increases. Studies suggest that reductions in transfer payments and social spending have a relatively small impact on economic growth.
- Sustainable Debt Reduction: Research indicates that successful fiscal consolidations, defined by sustained debt reduction, are more heavily focused on spending cuts, particularly in transfer payments and social spending.
- Reforming Tax Preferences: Significant spending occurs through the tax code in the form of refundable tax credits and other tax preferences. Reforming these preferences could yield substantial budgetary savings and allow for more effective pro-growth tax cuts.
Conclusion
The House Budget Committee’s resolution provides a framework for potentially significant pro-growth budgetary reforms, including the extension of the TCJA. While the details will be crucial, the resolution encourages policymakers to pursue reforms that prioritize economic growth.