Yesterday, the Trump administration released the long-awaited budget for the fiscal year 2018 and the administration’s priorities for the next 10 years. The Trump administration expects to eliminate the government deficit by 2027 due to a combination of higher GDP growth (3% per year) and large welfare spending cuts.
We think it is unlikely the supply-side effects from Trump’s economic policy (deregulation, tax reform,infrastructure investments) will increase GDP growth to 3% even if fully implemented.
The budget reflects the Trump administration’s expectation of full implementation of its policy proposals,which we think is unlikely given the disagreement within the Republican Party. Although all Republicansshare the same goal to cut and simplify taxes, they disagree on the financing. While moderate Republicansdo not want to make big cuts in other parts of the budget, fiscal hawks do not want to increase thegovernment budget deficit/debt to finance this. Thus, we may see a repetition of the Republicans’difficulties to change Obamacare.
We do not expect the US Congress to pass a new budget before the fiscal year starts on 1 October, henceCongress likely needs to pass a short-term funding bill to keep the US government running. This alsomeans there is a risk of a government shutdown by 1 October –also note that the US Treasury exhausts itsextraordinary measures during the autumn and Congress has still not found a solution to the debt limitissue.
We maintain our long-held view that Trumponomicswill come later and be smaller than pledged. We do notexpect a deal on tax reform before end of the year, at the earliest.
