House Republicans last week introduced a ten-year budget framework. It allows for up to $4.5 trillion in tax cuts, with a focus on extending expiring provisions of the Tax Cuts and Jobs Act (TCJA), and calls for trimming at least $1.5 trillion in spending. Tax cuts would be dialed back if more than $2 trillion in spending cuts are not found.

The framework’s numbers assume that tax and spending cuts in the budget will help stimulate the economy, offsetting some of the revenue losses. Specifically, the budget assumes that “macroeconomic effects” – broadly, economic growth or increases in gross domestic product (GDP) – will increase federal revenues by $2.6 trillion.

Is this assumption realistic?

Competing growth projections

The budget framework’s assumed $2.6 trillion in revenue from macro-level economic effects far exceeds estimates of the effects of TCJA extension produced by non-partisan sources—TPC (about $222 billion), CBO (little budgetary impact from increased revenues and higher interest rates), and other forecasters. 

A similar disconnect emerges from examining the economic effects required to produce the framework’s assumed impact on revenues. The $2.6 trillion feedback assumed in the resolution amounts to over 4 percent of baseline revenues, which would require the economy to be about 4 percent larger on average. 

But that impact far exceeds advance projections of the effects of TCJA on GDP (almost all of which were well under 1 percent), as well as retrospective estimates of the effects of TCJA (which find modest effects at best). 

Other considerations

Accompanying TCJA extension with spending cuts would, after dampening growth initially, increase the feedback effects over ten years by reducing the crowding out effect of increased deficits—but nowhere near enough to generate the assumed boost in revenues. For example, the CBO has estimated that $2 trillion in deficit reduction would boost GDP by about half a percent after 10 years—or an average of less than a quarter of a percent each year over the period. 

And other factors could reduce the economic effects relative to those of TCJA’s adoption. For example, one of TCJA’s main business provisions, the corporate tax rate reduction from 35 percent to 21 percent, is already baked into the legislation so won’t account for any future growth from extending TCJA’s expiring provisions.

Reasonable estimates of how policies would affect the larger economy depend on details about what those policies are. As is common at this stage, the framework doesn’t specify those details, and it’s possible the $2.6 trillion estimate will be revised once specific policies are known. 

Still, claims of macroeconomic effects of this magnitude – especially at this early stage – should be viewed with caution.