The US budget should help economic growth

US Capital Buildings

The Trump administration White House has set out its preferred budget for 2019. It is likely the House and Senate will wish to tone down its dramatic proposals.

The President’s wish is to boost military and veterans expenditure substantially, whilst cutting back hard on various other departments and programmes. A 13% increase in defence is offset by reductions of 10% in education, 18% in housing, 26% for the State Department and 34% at Environmental Protection. Veterans would receive an 11% boost, with an 8% increase for Homeland Security to include building more of that wall.

He wishes to allocate $200bn for infrastructure over the budget years, which he thinks will trigger $1 trillion of extra infrastructure investment. The White House points out that most infrastructure is owned by the individual states or private sector interests, reducing the scope for the federal government to achieve what it wishes and increasing the danger that the owners will sit and wait in the hope of a Federal subsidy. Despite this, the President backs several federal schemes which he hopes will incentivise rather than slow things down. The largest is $100bn of incentive grants designed to reward innovation and to expedite progress on projects. There is a $50bn rural fund that will offer money in competitions for funds against specified targets, and smaller pots to encourage private finance.

Overall the budget proposed shows the federal deficit rising from $665bn in 2017 to $873bn in 2018 and $984bn in 2019, where it hits 4.7% of GDP. Thereafter the budget deficit falls as a proportion of GDP to reach 1.1% by 2027, the end of the forecast period. This represents a further stimulus to economic activity for the balance of this decade. The budget is unlikely to deliver the large cuts proposed in some areas, where Congress will be more susceptible to lobbying. The estimates do include a sharp fall in corporation tax receipts, from $297bn in 2017 to $218bn in 2018, with continuing low levels in 2019, reflecting the cut in rate. It may be the case that more revenue is collected, given a good economic response to the cuts and given the rises in profitability now coming through.

More interesting than the budget lines, which are likely to be much modified, are the statements about regulation and managing the Executive which rest more squarely in the power of the White House. Executive Order 137771, early in Mr Trump’s tenure, required agencies and departments imposing new regulations to remove two old ones for every new one imposed. In the first eight months of the Presidency they claim that 67 old Regulations were scrapped and only 3 new ones allowed, producing savings of $8bn a year. They cancelled or delayed 1500 new regulations that were in the pipeline and expect to repeal many more in the year ahead. Some of this has helped promote more domestic energy production.

Executive Order 13781 offers a “Comprehensive Plan for reorganising the Executive branch” of government. This March we are told there will be a fuller statement of how they intend to modernise government, whilst streamlining it and cutting its cost. There will be named people responsible for improvements, with targets set to raise efficiency and improve the quality of service. The President wants a better customer experience. He wishes to see a major modernisation of IT, with better call centres, good use of the cloud, integrated data systems and high levels of cyber security. Some agencies will be slimmed down, others abolished or amalgamated. He wants stronger controls against improper payments, better purchasing and increased accountability on grants. Numerous reports, plans and administrative work will be discontinued.

All this is often said by political leaders seeking reductions in spending without damaging core priorities. It will be interesting to see if Mr Trump can prize the large sums out of the costs that he wishes, given the resistance to change that is usually found in government departments and agencies. It sounds as if the White House team mean business. Their March blueprint will be an interesting document, as they need to translate general aspirations and rough estimates into practical actions that can streamline and improve government. Much of it they have the power to do, but where they wish to change the legal architecture of regulatory bodies they will need Congress approval.

Overall this is an expansionary budget. It reaffirms key Trump themes, from energy self-sufficiency to stronger border controls. It lacks a big cash boost to infrastructure from federal sources, and its longer term success rests in part on ambitious plans for remodelling government that are still being worked out. The extra spending puts more pressure on bonds as it might mean higher interest rates. It also means more turnover for US companies as the spending flows through.

 


The above article was first published by Charles Stanley on 15th February 2018