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Trump’s Massive Spending Cuts Unlikely to See Daylight

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Office of Management and Budget Director Mick Mulvaney released President Donald Trump’s detailed budget on Tuesday.

The detailed budget, which expands on the skinny budget released in March, includes an increase in defense spending, domestic cuts and optimistic growth assumptions.

Mulvaney, who held an on-the-record, off-camera briefing on the FY18 budget on Monday afternoon, will testify Wednesday in front of the House Budget Committee and Thursday in front of the Senate Budget Committee.

“If I had a subtitle for this budget it would be the ‘taxpayer first’ budget,” Mulvaney said during the briefing. “This is I think the first time in a long time that an administration has written a budget through the eyes of the people that are actually paying the taxes.”

The budget includes a 10% increase in defense spending. This includes $639 billion for the Department of Defense, reversing the defense sequester and filling gaps in warfighting readiness. The budget also includes $44.1 billion for the Department of Homeland Security and $27.7 billion for the Department of Justice, including critical law enforcement, public safety and immigration enforcement programs and activities.

The budget includes $3.6 trillion in spending reductions, intending to reach balance within 10 years. This includes cuts of nearly $1 trillion over ten years in Medicaid, food stamps and other antipoverty programs.

According to Mulvaney, the major areas of savings are coming from the repeal of Obamacare, cuts to the food stamp programs and federal aid for student loans, and reform to the federal employee retirement programs.

“The repeal of Obamacare is the number one item. I want to say that was about $800 billion by itself,” Mulvaney said.

As Jeff Bush of The Washington Update points out, though, “it’s Congress that controls the purse strings.”

Any appropriated budget is going to require 60 votes from the Senate, Bush said.

“Which means that assuming you can hold all 52 Republicans together, you’re going to have to have eight Democrats to vote along with you,” Bush told ThinkAdvisor in a phone interview. “And there’s no way that Democrats are going to vote for those kinds of cuts to those departments.”

Bush called the president’s budget more of a guide post or wish list from the White House, adding that “it really does not mandate that Congress follows that.”

Bush expects the real budget debate will happen in September when Congress is trying to pass the appropriated budget.

“That’s when Democrats will have a lot to say about what ends up in that final budget,” Bush said. “I think it will look more like what budgets have looked like in the past of dollar-for-dollar increases. ‘Fine, Mr. Trump, we’ll give you X amount for defense, but we want X amount for domestic spending.’ I think that’s probably the model that we would anticipate seeing later this late summer.”

Bush says that’s the only path forward to get to 60 votes. The other option is to do anther continuing resolution, and Bush added that “that doesn’t serve anyone’s purpose, certainly not the American population.”

Mulvaney, who served on the U.S. House of Representatives from 2011 until he became Trump’s OMB director, knows how Congress often starts anew from the president’s budget proposal — and expects that.

“Do I expect them to adopt this 100% wholeheartedly without any change? Absolutely not,” Mulvaney said. “Do I expect them to work with the administration on trying to figure out areas where we’re on the same page? Absolutely. I don’t think it invalidates the importance of the credibility of the president’s budget just because they’re not going to pass it wholeheartedly.”

According to Mulvaney, the president’s budget profosal sends a message to Congress on what his priorities are, where he wants to spend more money or less money.

“One of the big ticket items is I want more money for defense,” Mulvaney said of the president’s priorities. “I want more money for border security. I want more money for the vets and school choice. And, I don’t want to add to the deficit this year. And I want to be responsible for the taxpayers in a way we haven’t been before.”

Here are the major highlights from the new budget that may interest financial advisors:

3% GDP Growth

The White House is projecting the GDP growth rate will rise to 3% by 2021, which is higher than the 1.9% forecast by the Congressional Budget Office.

A Wall Street Journal report says that “It’s unusual to see the White House’s growth forecasts differ from the CBO and other blue-chip projections by such a large margin over such a long stretch of the 10-year budget window.” 

Mulvaney, during the briefing, called the CBO’s 1.9% forecast “sad.”

“I think it’s sad that the previous administration was willing to admit that we couldn’t get better than 1.9% growth in the next 10 years,” Mulvaney said. “I think it’s sad the CBO does the same thing. The Congressional Budget Office assumes that we’ll never grow at more than 1.9% again, out into infinity.”

To get to sustained 3% economic growth, Mulvaney said that “we need folks to work.”

“We need people to go to work. If you’re on food stamps and you’re able-bodied, we need you to go to work,” he said during the briefing. “If you’re on disability insurance and you’re not supposed to be, if you’re not truly disabled, we need you to go back to work.”

According to Greg Valliere’s Capitol Notes, this may be easier said than done.

“The main flaw in that goal is becoming obvious — not enough workers, as state after state reports unemployment rates of close to 3%,” said Valliere, the chief global strategist for Horizon Investments.

Medicaid, Medicare and Social Security

The budget proposes to reform Medicaid by giving states the choice between a per capita cap and a block grant and by empowering states to innovate and prioritize Medicaid dollars to the most vulnerable populations.

“We assume the [American] Health Care Act that’s passed out of the House that has some Medicaid changes into it, we wrapped that into our budget proposals,” Mulvaney said during the briefing.

The budget also follows through on a campaign promise and prohibits any funding in the Labor-HHS appropriations bill for certain entities that provide abortions, including Planned Parenthood.

Also as promised on the campaign trail, the president’s budget does not cut core Social Security benefits or Medicare.

The president’s budget also funds the administrative component of Social Security at the same levels as 2017, ensuring there are no cuts to customer service for beneficiaries and applicants.

However, according to Valliere, Social Security and Medicare are “where the real money is” and will need to be curbed soon.

“[N]either party wants to go after these programs; even a modest change in the [Consumer Price Index] component of the cost of living adjustment is considered politically radioactive,” he wrote in his Capitol Notes. “A pity on the future president who eventually will have to take a meat ax to Social Security and Medicare in a few years.”

Market Impact

Bush anticipates some market volatility in September when the real budget debate takes place.

“To the extent that individuals or financial advisors are a little more tactical in the way they invest, we think they’re going to find some interesting entry points later this year,” Bush said. “Not only with the 2018 budget discussion but also the debt ceiling. Because now the Republicans are going to have to sign off on a 20-plus trillion-dollar federal debt.”

Valliere agrees that there are likely to be higher deficits.

“If spending cuts are not realized and tax cuts aren’t fully paid for, the major implication is obvious: significantly higher deficits,” he wrote in his Capitol Notes.

Valliere thinks there’s no question that Trump’s spending cuts will be watered down. And while he thinks a tax cut is likely next year, he says the “scoring” will be a problem for Trump.

“Even using very rosy assumptions, his bill would lose trillions of dollars in the next 10 years, so we have a hunch the tax bill will have to be scaled back,” Valliere said.

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