US spending cut push could come with political costs

Outlook

Meeting his cabinet on October 17, President Donald Trump instructed the secretaries to shave 5% off their departments’ expenditure, including curtailing wasteful spending -- although the defence department faces a 2.5-3.0% cut (Trump is increasing US military capacity).

Trump’s administration is in the early stages of preparing the 2020 fiscal year budget recommendation the president will send to Congress -- an opportunity to tackle the rising federal spending deficit. Yet Trump also seeks these cuts with an eye towards presenting Republicans as overseeing the economy and national finances effectively, and towards his own re-election in 2020.

Impacts

• The Republicans’ planned second tax cut would increase the federal deficit further, absent continued economic growth maintaining tax income.
• Spending cuts would probably fall on entitlement programmes and could also occur via public project deferments, such as infrastructure.
• If Democrats win all or part of Congress in 2018, 2020 or 2022, they would push back on Republican spending cuts, or demand concessions.
• US growth, which was 4.2% in the second quarter, will likely slow; foreign trade conflicts could worsen this (and lose votes).