Photo: Congressional Budget Office, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022; Romney Plan forecast projected by Business Insider based on campaign statements
We have analysed the likely impact of Mitt Romney’s economic plan on the country’s national debt and deficit.Our analysis suggests that the Romney Plan will radically increase America’s debt and deficits over the next 10 years.
Importantly, this is not to say that the Romney plan will be bad for the economy.
By providing additional stimulus in the form of massive government deficit spending, the plan may well reduce the unemployment rate and accelerate GDP growth faster than current law (which calls for “Fiscal Cliff” spending cuts and “Taxmageddon” tax increases early next year). If the country is to incur this much additional debt, we would prefer that such deficit spending include a major infrastructure investment and rebuilding program. But the debt growth itself may not be bad.
Based on our analysis, though, the idea that the Romney plan will ease our debt and deficit problem is laughable. Under almost any realistic scenario, it will make the problem worse.
Let’s go to the charts >
To conduct our analysis, we started with the Congressional Budget Office’s official 10-year budget projections and then made assumptions about the impact of the Romney Plan.
We ran two scenarios:
- “Best Case” scenario, in which the Romney Plan sharply accelerates economic growth, and
- “More Likely” scenario, in which the Romney Plan modestly accelerates growth
We did not run a “Worst Case” scenario (too depressing).
Importantly, our goal was to determine what is actually likely to happen under the Romney Plan, as opposed to what the Romney campaign vaguely says will happen. For example, we did not accept Romney’s premise that he will eliminate enough loopholes to make his tax cuts revenue neutral. Romney has not identified one single tax loophole he is willing to cut, and he has suggested he will protect some popular ones. So we think it is highly unlikely that Romney will eliminate enough tax loopholes to make his plan revenue neutral.
We also did not accept Romney’s premise that he will cut federal spending to 20% of GDP by 2016 from the current 24%. Again, Romney has not identified a single government program that he wants to cut (other than general non-defence discretionary spending, which is already at an all-time low as a per cent of GDP). We assumed instead that Romney will reduce government spending to about 22% of GDP, not all the way to 20%.
Importantly, we made several assumptions that are very much in Romney’s favour. We did not include the negative revenue impact of all of Romney’s proposed tax cuts, for example (e.g., eliminating the Alternative Minimum Tax). We also assumed that Romney’s plan will significantly accelerate growth. In fact, we assumed a strong economy for the next 10 years with no recessions—a streak of uninterrupted economic growth that has rarely happened in U.S. history. A recession during Romney’s term, which is highly likely, would reduce government revenue and increase the debt and deficit beyond what we have shown here.
Our analysis concludes that Romney’s plan will radically increase the country’s debt, both in absolute terms and as a percentage of GDP.
Let’s go to the charts >
Projecting the economic impact of tax and spending policy changes is a subjective exercise. The conclusion depends on assumptions about GDP growth, consumer behaviour, tax revenue, government spending, global trade (economic climate), and many other factors. As a result, all forecasts like these should be viewed as directional approximations rather than precise estimates.
That said, we have tried to be very reasonable in our assumptions. And, in many cases, we believe we have given the Romney plan a significant benefit of the doubt.
For example, Romney’s defence of the plan is based on his belief that it will accelerate America’s economic growth. We believe Romney’s confidence about this is based on a misdiagnosis about what is wrong with the economy: Contrary to Romney’s assertions, we don’t not believe the economy is choking under “regulatory uncertainty” or a lack of incentives for investors and entrepreneurs. Rather, we believe the economy is suffering from a lack of demand: Consumers don’t have enough money to spend. Nevertheless, to give Romney’s plan the benefit of some doubt, we have assumed that Romney’s plan will radically accelerate economic growth.
We have also assumed that there will be no recessions or economic slowdowns for the next 10 years. Adding to the last three years of economic growth, this would produce a streak of 13 years of straight economic growth. We think there is an extremely low likelihood that this will occur. Rather, we think there will be at least one and possibly two recessions in this period. But, again, to give Romney’s plan the benefit of the doubt, we have assumed steady and strong economic growth throughout the 10 years.
Also, we have not included the negative revenue impact of all of Romney’s proposed tax cuts in our revenue analysis. For example, we have not included the impact of Romney’s plan to eliminate the Alternative Minimum Tax or further reduce today’s low taxes on dividends and capital gains. Instead, we have focused on the personal income tax cuts and corporate tax cuts. We have also given Romney credit for eliminating some loopholes, which will reduce the revenue impact of these cuts.
In short, we have made many assumptions that are very favourable to the Romney plan.
IMPORTANT NOTE: Part of the problem with Romney’s plan is that it provides so few specifics. For example, the Romney campaign insists that the plan will be “revenue neutral” and will accelerate economic growth, but it offers no numbers or assumptions or specifics to back this up. If the campaign actually has numbers and assumptions to back up its claims, we would be eager to analyse them. If we find the campaign’s logic persuasive, we will revise our conclusions. Similarly, if readers make persuasive points about why we should change our assumptions, we will change them. So please weigh in.
(But please don’t try to persuade us by yelling that we’re obviously “in the tank” for Obama just because we’re trying to figure out what Romney’s plan will do to the debt and deficit. The debt and deficit are big problems for the country. For everyone’s sake, we need to take an objective look at them, not immediately descend into partisan rooting.)
Here are the basic assumptions in our two scenarios:
BEST-CASE ROMNEY PLAN SCENARIO ASSUMPTIONS:
- We assume Romney will cut income tax rates by 20% across the board and cut the statutory corporate tax rate from 35% to 25% (a 28.5% cut).
- We assume Romney will eliminate some loopholes to reduce the impact of the income tax cuts, resulting in an effective income tax cut of 17.5%.
- We assume no revenue loss from Romney’s planned elimination of the Alternative Minimum Tax and reduced taxes on capital gains and dividends (there will almost certainly be some revenue loss).
- We assume economic growth for the next 5 years (2013-2017) accelerates to 8.4% annually (nominal). This is more than 1 point above the CBO’s “Alternative Scenario,” which calls for 7.1% annual growth. It is also an enormous acceleration over current economic growth, which is about 4% nominal.
- We assume economic growth of 6.5% per year from 2018-2022 (nominal). This is a more normal rate of growth and inflation than we’ve seen in the past few years, but one that still represents a significant acceleration over the CBO’s forecast (5.5%) and current economic growth (~4%).
- We assume no recessions or slowdowns for the entire 10 year period (highly unlikely).
MORE-LIKELY ROMNEY PLAN SCENARIO ASSUMPTIONS:
- We assume Romney cuts income tax rates by 20% across the board and cuts the statutory corporate tax rate from 35% to 25% (a 28.5% cut). [SAME]
- We assume Romney eliminates some loopholes to reduce the impact of the income tax cuts, resulting in an effective income tax cut of 17.5%. [SAME]
- We assume no revenue loss from Romney’s planned elimination of the Alternative Minimum Tax and reduced taxes on capital gains and dividends (there will almost certainly be some revenue loss). [SAME]
- We assume economic growth for the next 5 years (2013-2017) accelerates to 6.6% annually (nominal). This is slightly below the CBO’s “Alternative Scenario,” which calls for 7.1% annual growth. It still represents an enormous acceleration over current economic growth, which is about 4% nominal. [SLOWER THAN “BEST CASE”]
- We assume economic growth of 5.5% per year from 2018-2022 (nominal). This is in line with the CBO’s forecast (5.5%) and comfortably ahead of current economic growth (~4%). [SLOWER THAN “BEST CASE”]
- We assume no recessions or slowdowns for the entire 10 year period (highly unlikely). [SAME]
First, some long-term context. Here's a chart showing GDP (blue) and Debt-To-GDP (red) for the last 70 years. We're already at a level of debt-to-GDP that we haven't seen since the immediate post-World War 2 aftermath. Importantly, though, we did recover from that.
Here's what these different scenarios look like when you take a longer-term view. Again, we're assuming that the Romney plan produces the fastest growth of all three options (which seems like a very pro-Romney Plan assumption)
And now for debt as a per cent of GDP (Importantly, these projections use debt held by the public, not total debt. They exclude the debt that the federal government holds). Again, let's start with the 10-year economic projections from the CBO. Here's what the CBO expects for debt-as-a-per cent-of-GDP under current law.
Lastly, debt-to-GDP (again, using debt held by the public, not total debt). Here, again, is debt-to-GDP under the CBO baseline scenario.
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