What's in the Trump Budget Proposal?
On Tuesday, May 23rd, the Trump administration released it's first budget proposal. The Trump budget proposal contains many "deep" cuts, many of which are attracting media and finance sector attention. There are also notable expansions in the budgets of select Agencies and programs, all of which we will detail.
Now that we have a clear picture of the actual proposals- speculation has been hot on the topic for weeks, notably in Bloomberg Politics reports- we're left wondering what the likelihood of this budget becoming reality is. Given that it takes 60 votes in the Senate to make law out of such proposals, and granted the GOP has 52 votes at the moment, some amount of compromise is almost inevitable. To that point, Mitch McConnell (Senate GOP leader) stated last week "The Democrats aren't irrelevant in the Senate, and they won't be on this." 1
In short, it remains to be seen whether or not this proposal survives the Congressional process needed to bring it to fruition. What will be most interesting to see is how the proposed Tax Reform measures suggested in this budget proposal will pan out. It's the first real look at what the "Tax Reform" we have heard about from Donald Trump since early in the Primary Election campaign will look like.
An important part of the Trump Budget Proposal is Tax Reform. What this precisely means has been hinted at many times by voices from within the administration as well as the administration's allies in Congress. The May 23rd budget proposal finally gives some concrete facts on how this will work.
Core Principles of Proposed Tax Reform
•Lower individual income tax rates
•Expand the standard deduction and help families struggling with child and dependent care expenses
•Protect homeownership, charitable giving and retirement saving
•End the alternative minimum tax
•Repeal the 3.8 percent Obamacare surcharge on capital gains and dividends
•Abolish the death tax
Table "S-9" of the budget proposal details the Economic Assumptions of the proposal. This is an interesting part of the proposal, because it details the economic growth assumptions made by the budget parameters. Without these assumptions, we wouldn't be able to balance the impacts of these proposals on debt and deficit, which are critical to the ability of Congress to justify passing or not passing this legislation.
The most interesting assumption made is that starting in 2018, there would be 3% annual economic growth. 2 This is important because 3% annual growth is substantially higher than the level of growth the economy has seen in recent years. It's also notable because Trump has promised an expected 4% growth since being elected in November 3- 3% is actually a far cry from 4% when it comes to compounding annual growth.
Also notable in this table of economic assumptions is the projected Consumer Price Index (CPI, aka inflation) rate. The budget projects an annual inflation rate of 2.3% in every year. There will be those that argue that this number is high given that in the last three years, we've had 1 year well under 1% and one year just over 1% even in the midst of an economic recovery and a bullish streak in capital markets. Others will say this is quite low given the longer-run rate of inflation tends to be closer to 3%, especially when GDP growth is 3%.
The Cuts- aka Winners & Losers
The headline number of the Trump budget proposal is $3.6 Trillion. That's the quantity of cuts to Federal spending the proposal makes over the next 10 years. There are three department with notable spending increases: Department of Homeland Security, the Department of Veteran's Affairs, and the Department of Defense. There are 11 departments that will see cuts in excess of 4%. Next we will give the run down of "winners and losers" with their percentages of cuts or expansions.
Department Spending Increases
Department Spending Cuts
There are many more items of interest in this budget proposal- infrastructure spending, border security, and immigration reform, for instance. We highly recommend giving the document a read. If passed- even in limited form- the Trump budget proposal does represent substantial reform of government spending and taxation. Whether it has any potential to pass in any way remains to be seen. We'll certainly update you as this situation develops.
Meet the Author & Portfolio Manager
Victor Schramm is a Certified Fund Specialist (CFS®), with expertise in Mutual Funds & Variable Annuity Separate Accounts. He focuses on long term investing geared toward our annuity clients as a Fee Only Investment Advisor. He lives in Portland, OR.