Two Enormously Flawed Assumptions in the Trump Budget

by Greg Valliere, AGF Management Ltd.

WE’VE THOUGHT FOR YEARS that mid-winter presidential budgets from either party weren’t worth the paper they’re printed on, and this year’s is no exception. No need to pore over Donald Trump’s fiscal 2021 budget, because its goals are based on two enormously flawed assumptions:

1. There is no way — none — that the liberal House would accept Trump’s proposed
draconian cuts to Medicare, food stamps and other safety net programs. Not even the Senate, which just acquitted Trump, would accept his cuts, which violate last year’s spending deal.

The gridlock over spending almost certainly will prompt Congress to “kick the can down the road,” stalling on a budget until after the Nov. 3 elections. Lawmakers likely
will pass a “continuing resolution” that would last into next winter; even if Trump is
re-elected, he will be forced to capitulate and accept a budget that spends far more than he seeks.

2. Today’s budget will assume a balanced budget within 15 years (spoiler alert: it won’t happen). That’s because of the other flawed assumption — GDP growth will average 3% per year for those 15 years, apparently without a recession during that entire period. The assumption of a slight deficit reduction next year also assumes 3% GDP growth.

We’ve been fairly bullish on GDP growth (with no recession this year). We think the
economy can grow by 2% or a little better. But growth of 3%, well above trend, would require a much bigger labor force, which simply cannot be attained without immigration reform, which is hopelessly stalled.

Some other tidbits:

We get the sense that still another tax cut, for the middle class, has moved from the front burner to the back burner. It may not be mentioned in today’s report, because it has no chance of enactment and doesn’t poll well. This means there are no looming deals on capital gains or the state and local tax break.

Moving from the back burner to the front burner — Infrastructure spending. We think
Trump will propose a major new bill this year, with the possibility of enactment in 2021.

Trump is asking for only $2 billion to fund the border wall with Mexico, a mild surprise. He still plans to shuffle funds from Pentagon construction spending to the wall, however.

Spending for foreign aid, always a juicy target — on paper — will hit a brick wall
in the Senate.

The enormous rise in defense spending appears to be slowing in the new budget, but a proposed 0.3% Pentagon increase — sure to be hiked in the Senate — does not include a potentially big chunk of money for the slush fund known as the Overseas Contingency Operation program.

BOTTOM LINE: There are so many silly assumptions — including a big drop in debt servicing costs — that make this budget unserious, like all presidential budgets. Deficits are headed higher, not lower; everyone endorses the goal of lower deficits, but no one wants to accept the prescriptions that would achieve that goal.

* * * * *

WHAT A FINISH IN NEW HAMPSHIRE: We’ll make final predictions tomorrow, but for now it looks like a Bernie Sanders-Pete Buttigieg photo finish, with Elizabeth Warren and Joe Biden fighting for third place; they both could be running out of money soon.

And just to complicate matters, the trendy new pick is Amy Klobuchar, who had still
another excellent debate on Friday night and could hit double digits tomorrow, a high point for her before the Mike Bloomberg tidal wave hits in March.

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This post was first published at the AGF Perspectives Blog.