US Budget proposals: curb your enthusiasm

Peter Warburton - 08 March 2017

Listening to president Trump’s effusive address to Congress last week, almost anything seemed possible: healthcare reform, corporate tax reform, immigration reform, infrastructure and de-regulation. Over the course of many meetings in New York last week, I heard just as many opinions concerning the shape and size of the fiscal package that will emerge from this year’s Budget process. In theory, this will be all wrapped up by the start of the 2018 financial year, beginning 1 October 2017. In practice, such an ambitious and contentious Budget may not be approved until October-November, or even until early 2018.

The president is clearly a man in a hurry, but he faces three significant obstacles: process, politics and complexity. The Budget process is a laborious resolution of proposals batted back and forth between the House of Representatives and the Senate. The commitment to “repeal and replace” Obamacare has budgetary implications. Either it must be resolved before the Budget process begins, or it must be attached to the Budget legislation. Given that it took the Obama administration from July 2009 to March 2010 to enact the Affordable Care Act, and that the bulk of the provisions did not take effect until January 2014, the task of “repeal and replace” is complex and substantial.

The politics of the Budget are also deeply problematic. The House proposal (as formulated by Ryan and Brady) is essentially a revenue-neutral budget, cleverly designed not to offend the sensibilities of the hawkish ‘freedom caucus’. The Trump proposal makes no commitment to the funding provisions of the House proposal – essentially the controversial Border Adjustment Tax (BAT) and the ending of interest deductibility against corporate tax liabilities.

BAT creates winners and losers for various industrial sectors and various US states. Provided president Trump is supportive of BAT, in all likelihood, it will pass the House. However, the Senate will offer stern and belated opposition. Reputedly, there are at least 6 Republican senators (in Arkansas, Georgia and North Carolina) who would not vote for BAT because of the likely adverse economic impact on their states. The Republicans govern the Senate only by 52-48. Without the revenue raised by BAT, the budget loses its neutrality and would need to rely on what is known as “dynamic scoring” to secure the approval of budget hawks.

The broader conundrum concerns the intersection of the president’s abrasive style of governance with the messy business of political compromise and the stroking of egos. Congress can’t wait to cut president Trump down to size. The Democrats can be relied upon to oppose just about every proposal of the Trump administration. Many Republicans will demand significant concessions in return for their support. Within a short while, today’s idealistic agenda will collapse into a more modest but practicable set of proposals, which may well exclude virtually all the elements that have propelled the Trump reflation trade, at least in terms of the 2018 Budget. Curb your enthusiasm.

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