The Strategist

New State budget will bring back the 90s in the US

05/24/2017 - 11:36

The administration of Donald Trump presented its first budget for the 2018 fiscal year. It involves cuts in social programs’ funding, higher defense spending, as well as new sources of income, including the sale of half of the oil reserves. The budget’s authors relied on acceleration of US GDP growth to 3% and the fact that tax cuts will pay off due to increased fees. Most experts consider such assumptions unrealistic.

lipton sale
lipton sale
Yesterday, the White House submitted a draft budget for the 2018 fiscal year (beginning October 1, 2017) to the US Congress. This is the first document detailing priorities of the new administration’s fiscal policy. One of the main objectives is reduction of the national debt, which now amounts to about $ 20 trillion. Of these, $ 14 trillion are placed in market bonds (77% of GDP). According to the plan, their volume will have grown to $ 18.6 billion, but will decrease to GDP to 60% in ten years.

The document assumes achievement the budget balance within ten years. This objective requires a reduction in government spending by $ 3.6 trillion. The government will boost costs on investments in infrastructure projects, offering to finance $ 200 billion from $ 1 trillion of the total cost. Defense and security spending will also grow by $ 470 billion over ten years ($ 2.6 billion for building a wall with Mexico). The plan cuts spending on non-government programs by almost $ 2 trillion over ten years, including through a sharp decline in financing of foreign operations (minus $ 693 billion). Significant savings should be ensured by replacement of the Obamacare program (minus $ 250 billion), as well as reformation of the Medicaid program (medical assistance to the poor, minus $ 610 billion).

Another radical measure is to sell half of the country's oil reserves, which now makes up 687.7 million barrels. The White House believes that in 2018 the revenues from such a sale could reach $ 500 million, and climb to $ 16.6 billion in ten years. Note that the former administration has already sold 190 million barrels of reserves (about 27%) for a decade, while now there is a legislative restriction on the reduction of reserves beyond 450 million barrels.

The financial plan’s drafters believe that a large-scale reduction in tax rates will pay off from the budget’s point of view. - the return on improvement in the economy is estimated at $ 2 trillion in ten years (mainly beyond 2020). Recall that tax initiatives include a reduction in income tax and inheritance taxes, cuts in the corporate tax rate to 15% with cancellation of a number of benefits, as well as transition to a territorial taxation regime (taxation of domestic source of profits).

The assumption of the tax plan’s self-sufficiency is built on the expectation of the US GDP growth of 3% per year from 2021. According to the estimates of the Congressional Budget Office, this figure will average 1.8% in the next ten years. The Committee for a Responsible Federal Budget note that the plan does not take into account the population’s aging - "to make it work, we need a time machine that would bring us back in the 90s (the US budget had been closing with a surplus from 1998 to 2002)". Apparently, the plan is unlikely to be approved by the Congress - primarily because of insufficient support for individual initiatives by Republicans. However, it will undoubtedly serve as a source for further discussion by legislators of both parties.