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“Maintaining current productivity rates would bring a continuation of the 2 percent economic growth rates that have prevailed over the past 25 years. As explained in the next section, pushing sustained economic growth rates up to 3 percent—which is a much greater jump than it may seem—would require nearly doubling long-term productivity growth rates. Nevertheless, such bold assumptions have long been a staple of GOP budgets. Major Republican tax cuts in 1981, 2001, and 2017 were each accompanied by assurances of colossal economic booms that would bring enough tax revenue to pay for the policies.”

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“In reality, these politician promises of aggressively accelerated economic growth are a lazy, longstanding gimmick meant to avoid the hard choices of restraining deficits and paying for their expensive proposals. They are based on little more than politicians’ wishful thinking and over-exuberant faith in the brilliance of their own policy agendas.

No magical economic growth lever exists in Congress or the White House. Economists can analyze which economic systems produce long-term prosperity, including whether or not certain policies are generally pro-growth. However, short- and medium-term economic growth rarely behaves according to forecasting models.”

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“There is little economic basis to expect permanent, sustained 3 percent growth rates to result from extending the 2017 tax cuts, repealing taxes on tips, overtime, and Social Security benefits, providing some regulatory relief, and imposing steep tariffs. Sure, policymakers should aspire to such growth, yet basing the federal budget on that assumption is reckless.”

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“Perhaps my economic analysis is too pessimistic. For the sake of argument, let’s imagine a world where Trump’s economic policies or an AI revolution nearly double productivity growth rates and thus produce sustained 3 percent economic growth despite the labor force headwinds. Would such growth provide enough budget savings to finance the Trump agenda and prevent deficits from escalating?

Unfortunately, the answer is still no. Calculations from the OMB show that permanently elevating annual economic growth rates from 2 percent to 3 percent would produce annual new tax revenues of $100 billion to $200 billion during Trump’s current presidential term, swelling to roughly $700 billion a decade from now. However, while revenues would grow quickly over time, so would the offsetting budgetary costs. Long-term Social Security expenses would climb because benefits are based on wage growth that also rises with faster economic growth (which is why improved economic growth would not significantly improve Social Security finances). Medicare and broader healthcare consumption also typically grow with rising incomes. Most importantly, faster economic growth tends to increase the demand for capital, which in turn raises interest rates. A corresponding 1 percent jump in interest rates would produce enough new national debt interest costs to consume the vast majority of first-decade growth revenues.”

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“Economic growth can solve a lot of problems, but entitlement-and-interest-driven budget deficits leaping towards $4 trillion within the decade is not one of them.”

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“even strong growth revenues would finance only a small fraction of the Trump/GOP policy agenda and none of the underlying baseline deficits that are growing so quickly.”

https://reason.com/2025/02/07/washingtons-debt-delusion-economic-growth-cannot-fix-the-deficit/