White House economic advisor Larry Kudlow said Thursday that President Trump would allow sharp reductions in federal spending to take effect next year if Congress fails to agree to the White House’s 2020 budget.
“The president has indicated, if the spending caps going all the way back to the 2011 deal are not met, then we will sequester across-the-board, both defense and nondefense, excluding entitlements, but we will run by those rules,” Kudlow, the director of the president’s National Economic Council, said at an event hosted by The Hill. “That’s tough stuff. I think that’s appropriate,” he added.
Spending caps set in place by the Budget Control Act of 2011 will reduce discretionary spending by $125 billion in fiscal year 2020 if lawmakers are unable to reach a deal to raise them. Defense spending would fall by about $71 billion from current levels, and nondefense discretionary spending would drop by about $54 billion.
President Trump’s budget proposal sticks to those caps for the most part, although it provides an additional $165 billion for defense through a special war-fighting account that is not subject to spending limits – a workaround that many lawmakers have criticized as a “gimmick” that is unlikely to find much support from lawmakers.
Congress is working a deal: Senate Majority Leader Mitch McConnell (R-KY) said earlier this week that he and House Speaker Nancy Pelosi (D-CA) will begin talks on a two-year deal to raise the budget caps.
Senate Budget Committee Chairman Mike Enzi (R-WY) has proposed a 2020 budget that sticks to the caps while providing far less cap-free funding for the war-fighting account.
In the House, Democrats are still struggling to agree on spending levels, with members of the Progressive Caucus scuttling a vote on a budget bill earlier this week, driven by concerns over parity for defense and nondefense spending. House Democratic leaders have proposed spending $631 billion on nondefense discretionary programs and $664 billion on defense next year – raising the spending caps by $34 billion and $17 billion respectively – but more liberal lawmakers are calling for $33 billion more for nondefense, to equalize the levels. On Tuesday, the House adopted a resolution that set an overall spending cap of $1.3 trillion, leaving the funding details to a later date.
But Trump has to agree: If Trump vetoes a spending deal that raises the budget caps – he said he would “never sign another bill like this again” in March 2018 when he agreed to the current two-year spending deal – the government would face another shutdown threat when the new fiscal year begins on October 1, and require a short-term funding package to keep the doors open. And if Trump refuses to agree to any deal that provides an increase in the budget caps, as Kudlow suggested Thursday, automatic spending cuts would take effect in January, through budget sequestration.
The economy would take a hit: If Congress and the White House are unable to agree on a deal to raise the spending caps, the automatic spending cuts that occur under the Budget Control Act could create a significant drag on economic growth in 2020. Goldman Sachs economists Alec Phillips and Blake Taylor said last week in a note to clients that they expect fiscal policy to weigh on economic growth next year, with the worst-case scenario being a failure to raise the budget caps (see the chart below).
The most likely scenario in the Goldman analysis is a spending deal that raises the caps, although only to levels roughly equal to current spending. Even that would fail to boost the economy, however, since fiscal stimulus is produced by the rate of change in spending, not the absolute level, Phillips and Taylor said.
Reviewing the Goldman projections, Jared Bernstein, former chief economist for Vice President Biden, said that weakening fiscal stimulus is “one reason to expect 2020 growth to be closer to 2 percent than 3 percent.”