Two Enormously Flawed Assumptions in the Trump Budget
Author: Greg Valliere
February 10, 2020
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.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
©2022 AGF Management Limited. All rights reserved.