Yesterday, the Trump administration released the long-waited budget for the fiscal year 2018 and the administration's prioritises for the next 10 years. The Trump administration expects to eliminate the government deficit by 2027 due to a combination of higher GDP growth (3% per year) and large welfare spending cuts.
We think it is unlikely the supply-side effects from Trump's economic policy (deregulation, tax reform, infrastructure investments) will increase GDP growth to 3% even if fully implemented.
The budget reflects the Trump administration's expectation of full implementation of its policy proposals, which we think it is unlikely given the disagreement within the Republican party.
Although all Republicans share the same goal to cut and simplify taxes, they disagree on the financing. While moderate Republicans do not want to make big cuts in other parts of the budget, fiscal hawks do not want to increase the government budget deficit/debt to finance this. Thus, we may see a repetition of the Republicans' difficulties to change Obamacare.
We do not expect the US Congress to pass a new budget before the fiscal year starts on 1 October, hence Congress likely needs to pass a short-term funding bill to keep the US government running.
This also means there is a risk of government shutdown by 1 October - also note that the US Treasury exhausts its extraordinary measures during the autumn and Congress has still not found a solution to the debt limit issue.
We maintain our long-held view that Trumponomics will come later and be smaller than pledged. We do not expect a deal on tax reform before end of the year, at the earliest.
To read the entire report Please click on the pdf File Below