Trump’s ‘Debt Bomb’: Deficit May Grow, Defense Budget May Not

WASHINGTON: “Trump is going to explode the debt,” GOP pundit Mackenzie Eaglen said. “What you’re going to see is a debt bomb.”

While the new president wants to grow the military, rebuild infrastructure, and cut taxes, Eaglen said, his plan to fund all that that through steep domestic spending cuts “is complete fantasy” that will never pass the Senate. (Any legislative path, even reconciliation, would require 60 votes). The only other way to pay is borrowing money — and “he’s mentioned many times on the campaign trail that’s he’s very comfortable leveraging debt.”

The result, said Eaglen, who’s close to most Republicans and defense hawks on the Hill, “will be a total bulldozing over the Tea Party,” which has seen the much-derided Budget Control Act (aka sequester) as a necessary limit on federal spending. The bulldozees-to-be in this scenario include Trump’s own pick for budget director, Rep. Mick Mulvaney, whose confirmation hearing before the Senate is tomorrow.

“I would not be surprised if they took the same approach that Reagan did,” said Mark Cancian of the Center for Strategic & International studies, speaking to me after the CSIS-hosted panel on which he and Eaglen both appeared. Ronald Reagan took office proposing defense increases and tax cuts, to be offset by economic growth and cuts to domestic spending, all very much like Trump. When Democrats blocked the domestic cuts, and the economic projections proved too optimistic — the so-called “Rosy Scenario” — the difference was made up by borrowing money, also known as creating big deficits.

Trump could very well follow a similar path. There’s already discussion of “dynamic scoring” that would bend traditional rules on how to estimate the cost of federal programs, said CSIS’s Andrew Hunter, and with Trump, “you could see dynamic spending on steroids: We’re going to spend more but it’s going to cost less.” Again, once the bills come due, the only way to make up a shortfall is by borrowing.

Todd Harrison, the panel’s host and a leading budget expert, was less sanguine about the prospects for big boosts, funded by debt or not.”It is equally, if not more, likely that the Trump administration goes in the opposite direction and they come out with a budget that actually dramatically cuts the size of the federal government,” Harrison told me.

Rather than get bulldozed, Mulvaney and the deficit hawks may prevail in the battle for Trump’s ear. If that happens, Harrison said, expect the administration to propose steep reductions in the size of the federal government — as it does in a leaked outline for a staggering $10.5 trillion in cuts over 10 years. In such a climate, defense spending would be stable at best.

“We’ll know within a few weeks,” Harrison said. “They’ll come out with their skinny budget (i.e. overall figures without detail justification) mid-to -late February. That’ll be our first indication of (whether) they go to one of these extremes or not.”

Either extreme is equally plausible, Harrison told me: debt-fueled spending increases or Spartan cuts. And whichever extreme hits the Hill, he added, Congress will force the final outcome back to the center.

No Christmas In July
Whatever happens, none of the experts expected a dramatic increase in defense spending in the near term. It takes took much time to thrash out a spending plan — and too much of Trump’s time and political capital will be consumed by higher-profile fights over repealing Obamacare, reforming the tax system and getting a Supreme Court justice confirmed.

“The most valuable resource on earth is floor time in the United States Senate, (and) it’s being used right now on Obamacare,” said Hunter. “The big moment of opportunity is going to be…the defense supplemental” to increase Pentagon spending for 2017.

But first, Hunter said, the Congress has to pass the 2017 budget so it can be supplemented. The current Continuing Resolution, which sets most (but not all) spending on autopilot at 2016 levels, expires April 28th. It’s unlikely Congress will pass a proper budget, let alone a supplemental, before that deadline — which is after Trump’s first 100 days.

When it finally does arrive, the 2017 supplemental will just be a down payment on Trump’s buildup plans. Even the 2018 budget, already drafted by the outgoing administration, will bear some Trump stamps but largely serve as a “bridge” to the 2019 proposal, the first crafted entirely under the new administration.

So no one in the Pentagon or defense industry should be shopping for a new light fighter yet. To the contrary: When the Trump plan finally comes, in addition to any increases, it will almost certainly make sharp cuts to perceived “waste” and “inefficiency” that may not be possible to execute.

“Their belief is, viscerally, in their gut, emotionally, there’s so much waste in defense,” said Eaglen. The Trump teams wants to “blow up” the intelligence and defense bureaucracies, she said.

“Trump indicated he thought there was a lot of waste in defense and therefore some of this increase could be funded by offsets within defense,” agreed Cancian. There certainly is inefficiency — but past attempts to wring it out have usually failed. “The obvious one is base closure,” said Cancian, but Congress has repeatedly shot that source of savings down.

Other potential savings are far more vague, like what Cancian called the “infamous” Defense Business Board report that prescribed $125 million in savings (over five years) by applying to the Pentagon percentage targets derived from private sector efficiency drives, without “any details” of how to apply these models to the Defense Department.

You can assume all the management efficiencies you want, said Eaglen, but when your budget counts on future savings before they’ve actually been realized, “it’s simply a topline cut.” (Reagan’s budgeteers marked such assumed savings with what they called “the magic asterisk.”) Overall, she said, that means the optimism about big defense boosts is overstated: “It’s not good news for defense. It’s not Christmas in July.”