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Trump: a budget and fiscal stimulus policy slowly takes shape

During his speech to Congress (28 February), Donald Trump did not provide the much-anticipated details about the budget measures he wants to enact. He was content to reiterate the broad outlines of his strategy: overhaul of Obamacare, tax cuts for households and businesses, investment in infrastructure and deregulation. However, judging by his administration's statements, his plan is slowly taking shape:

  1. Military spending will be increased by 9% or USD 54 bn (0.3% of GDP) over the next fiscal year (the 2018 fiscal year begins in October 2017). This extra spending will be funded entirely by cutting other budget items (starting with foreign aid).
  2. Tax cuts for households will be focused on the middle class.
  3. There will be no cuts in Social Security, Medicaid, or Medicare spending.

A little earlier in the month, Donald Trump was also promising a spending programme to renovate airports, though without providing any details on the timeline or the funds involved.

What are the next steps for the budget?

There is no predetermined budget calendar in the United States. It's up to the White House to send Congress a draft budget. The draft is then independently reviewed by the experts at the Congressional Budget Office, then by Congress, which drafts its own budget. Congress has the last word (but the President can refuse to sign).

On February 26, Treasury Secretary Steven Mnuchin let it be known: (1) that an initial round of measures would be voted on before August and (2) that a blueprint would be sent to Congress in mid-March by the Office of Management and Budget (OMB) at the White House. For a while, this announcement suggested that the President's detailed plan and its funding would be revealed by or before that date. OMB Director Mick Mulvaney had to step in to clear up the misunderstanding. Ultimately, on 16 March, the OMB will issue a draft and not a full-blown budget. We won’t see the latter until May. The draft will outline the administration’s key priorities, but tax and spending programmes will not be detailed at this point.

However, in the meantime, since the 2017 continuing resolution expires on 28 April, Congress will soon have to find a funding solution for the rest of the fiscal year, which ends in September. This will be the first test of Congressional Republicans' ability to pull together.

Trump's inability to move any faster (his predecessors were generally prepared to send full-blown budgets in February or March) clearly illustrates the strained relations between Republicans. In particular, the fate of the border-adjustment tax – proposed by the Republicans of the House of Representatives in order to balance the budget – is not yet sealed. The associated risks (rise in the dollar, disruption to value chains in the retail sector, inflation) are deemed to be too high. This measure has been rejected by a significant number of Republican senators and the Treasury Secretary is also against it. Yet Paul Ryan (Speaker of the House of Representatives who supports the measure) does seem to have found an ally in Steve Bannon, Trump's influential chief strategist. Against this backdrop, budget funding negotiations look like being long and arduous.

What impact will this have on monetary policy?

In spite of many unknowns, we now have enough information to conclude that risks to growth and inflation are tilted to the upside. That is clearly why several members of the Fed have opened the door to raising the fed funds rate on 15 March. In an economy close to full employment, it has become necessary to remove the degree of monetary policy accommodation in order to keep inflation expectations well anchored.














BOROWSKI Didier , Head of Macroeconomic Research
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Trump: a budget and fiscal stimulus policy slowly takes shape
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