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Global market slump a "reality check" for tech, says economist

A gigantic plummet in US stocks is hitting indexes as far away as Europe and Asia. Robert Koepp, Director of The Economist Network, Speaks with CNN News Stream.

Posted: Oct 12, 2018 5:34 AM
Updated: Oct 12, 2018 5:50 AM

US deficits are expected to balloon to $1 trillion when official figures are released next week -- but Treasury Secretary Steven Mnuchin says the massive Republican tax cut won't be to blame.

Instead, Mnuchin said Democrats were at fault for pushing spending increases on health and education in exchange for military budget increases as part of a massive spending package President Donald Trump signed in September 2017.

"People are going to want to say the deficit is because of the tax cuts. That's not the real story," said Mnuchin in an interview Thursday with CNN. "The real story is we made a significant investment in the military which is very, very important, and to get that done we had to increase non-military spending."

To avert a government shutdown, Republicans and Democrats struck a deal last year that included raising the spending on other government programs.

"If we could have approved that with 51 votes instead of 60 votes, we would not have spent as much money on non-military spending and the budget deficit would have been considerably smaller," Mnuchin said on the sidelines of the annual International Monetary Fund conference in Bali, Indonesia.

Yet the Republican tax cuts are costing the Treasury billions in revenue. The nonpartisan Congressional Budget Office, which analyzes legislation for Congress, forecast the tax cuts will expand the deficit to $804 billion in fiscal 2018, which ended on September 30. That's up from the $665 billion in fiscal 2017.

The cost of the tax cut, along with last year's spending bill, is expected to add up to roughly $1.5 trillion over the next decade.

The secretary declined to comment on details of the coming deficit numbers, which are due to be released by the Treasury Department on Monday.

The White House has claimed the tax cuts will pay for themselves and have been a driving factor boosting the economy in the nine full months since the tax law took effect on January 1. The US economy is expected to grow by 3% this year.

"We're on our way on growth, the tax bill will pay for itself and provide additional revenue," Mnuchin said.

The Trump administration projects that the economy will grow 2.9% each year over a 10-year window. If it does, the government expects to draw between $300 billion to $400 billion in excess revenues from the tax bill.

The Treasury secretary said the US may be drawing in less revenue initially from expensing but over time the administration expects it will help spur capital investment.

"We'll ultimately collect the revenues," Mnuchin said. "But clearly it will have an impact on short-term revenue."

Democrats have opposed the tax bill, attacking Republicans for crafting legislation that they say help wealthy Americans and corporations.

The country's debt is higher than in any year since World War II, according to the CBO, and now accounts for 77% of gross domestic product, a measure of the size of the economy.

The CBO predicts that by 2028, the national debt is on track to approach 100% of gross domestic product.

The $300 billion spending package signed by Trump allocated $165 billion to the Pentagon, a major priority for the White House and Republicans.

While the increase in military spending was a big win for Trump meeting a campaign promise, it came at the cost of maintaining programs like environmental protection, health research and foreign aid. It also marked a departure from GOP demands to cut spending under the Obama administration.

The widening deficit comes just ahead of the midterm elections as House Republicans are fighting to keep control of the House and Senate.

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