The best form of government is that which is most likely to prevent the greatest sum of evil.
-James Monroe
With the formal release of President Trump’s budget yesterday, we focus on three major areas for insight where Republicans in the House and Senate are likely to collaborate with the Administration as they begin their own budgeting process: (1) the specifics on the size of the tax cuts and what the dynamic effect of those tax cuts are estimated to be, (2) defense spending, and (3) how to factor in health care reform.
Tax: In the big budget reveal, the major missing piece was the huge tax cut. While it was included in the plan, any details about the elements or costs of the tax plan were absent. The Administration claims that the tax plan will not add to the deficit, and we expect many deductions will be eliminated to help them keep their promise. The tax cut though is key to balancing the budget over next ten years as the Administration is relying on the cuts to generate the necessary growth to make the budget balance. For the current budget to meet its expectations, Trump and OMB Director Mick Mulvaney are relying on 3% GDP growth which breaks from mainstream forecasts. Based on the tax savings and cuts elsewhere, the president was even able to add $200 billion for infrastructure spend. The Administration plans to lever this into $1 trillion through public-private partnerships, and Secretary of Transportation Elaine Chao is expected to unveil the plan in the next few weeks.
Defense: The new budget requests total Pentagon spending of $639B ($574B in baseline spending plus $65B in Overseas Contingency Operations (OCO) spending) an increase of $33B over FY17. Significantly, most of the total spending is proposed to come by increasing the baseline by $52B which is over 10% above the Budget Control Act cap of $522B. In actuality the Trump budget is only 3.3% above the Obama forecast for FY18 with half of that increase paying for a 56,400 total increase of the services’ end strengths. Most major investment programs would see little change from long standing forecasts. The defense budget request has already received push back from defense hawks in both Houses of Congress who would like to see a bigger increase in order to match Pentagon resources to Trump campaign rhetoric. The budget as proposed will have a difficult time as OMB wants to pay for the increase to the defense cap with an equivalent decrease in the non-defense discretionary cap, a change to the law that will require Democrat support. Additionally, the decrease in the size of the OCO request does not take into account proposed overseas policy changes that will increase troop levels in Afghanistan and activity in Syria. Our Senior Defense Policy Analyst General Emo Gardner has a more indepth analysis including the impacts on major defense contractors here.
Health Care: While Social Security and Medicare avoided cuts in the Trump budget, Medicaid and other welfare programs weren’t so lucky. As expected, the new Trump budget called for more than $800 billion in cuts to Medicaid while also cutting $192 billion from nutritional assistance and $272 billion overall welfare programs. The cuts to Medicaid will cause angst on both sides of the aisle as it was also the most contentious issue when trying to pass the AHCA in the House. The budget makes the assumption that the AHCA will make it through the Senate as is, which was a pipe dream well before the budget was even released.
As mentioned yesterday, there will continue to be plenty of noise and teeth gnashing over the budget release, but expect it to diminish within a matter of weeks as attention will return to Congress and the Herculean budget exercise ahead of them. The chart below shows the major proposed changes and their amounts over the next ten years:
WHILE WE WAIT FOR HOSPITAL OPPS: IMPACT OF MEDICARE KNEE REPLACEMENTS MOVING TO OUTPATIENT: You can find the full piece by our Health Policy Analyst Emily Evans here.
SPR CUTS IN TRUMP BUDGET PROPOSAL UNLIKELY: Our Senior Energy Policy Analyst Joe McMonigle writes that proposal to cut Strategic Petroleum Reserves in half is more about raising revenue than rising domestic production. You can read the full piece here.
FIRST LOOK AT PENTAGON BUDGET IMPACTS ON LMT, BA, GD, RTN, AND NOC: Our
Senior Defense Policy Analyst Emo Gardner writes prime contractors' major defense programs show few unplanned changes in FY18 Pentagon budget proposal. You can read the full analysis here.
LONGER NOT DEEPER: Our Senior Energy Policy Analyst Joe McMonigle writes OPEC likely to go with longer 9-month deal extension of production cuts instead of deeper cuts. You can find the full analysis here.
