Three Things Are About To Derail Trump's Fiscal Plan, Goldman Warns

Tyler Durden's picture

For some still unknown reason, Goldman Sachs, the bank that single-handedly accounts for the bulk of Trump's closest economic and financial advisors, and whose former COO has been reportedly tasked with hatching Trump's "phenomenal" tax plan, has been on a tear in the past month to discredit his proposed political agenda. Just last week Goldman slammed Trump's proposed economic plan, warning that unlike its earlier optimism, "one month into the year, the balance of risks is somewhat less positive in our view."  Goldman's Jan Hatzius then gave three reasons why his outlook had soured substantially in just a few months:

  • First, the recent difficulty congressional Republicans have had in moving forward on Obamacare repeal does not bode well for reaching a quick agreement on tax reform or infrastructure funding, and reinforces our view that a fiscal boost, if it happens, is mostly a 2018 story.
  • Second, while bipartisan cooperation looked possible on some issues following the election, the political environment appears to be as polarized as ever, suggesting that issues that require bipartisan support may be difficult to address.
  • Third, some of the recent administrative actions by the Trump Administration serve as a reminder that the president is likely to follow through on campaign promises

* * *

Now, in yet another note from Goldman over the weekend, the bank's Washington analyst Alec Phillips breaks down the "Fiscal Constraints on the Political Agenda" and lays out why, despite Trump's intention to announce "something phenomenal on taxes in the next 2-3 weeks", a statement which promptly boosted stocks to new all time highs, the reality is far different, and that between Trump's tax plans and various other aspects of the president's fiscal agenda, the most likely outcome will be imminent disappointment as the plan begins to move through Congress where it is about to hit major roadblocks.

The reason for the latest dour outlook on Trump's fiscal overhaul is that, as Phillips explains, in recent years, congressional Republicans have offered annual budget resolutions that aim to eliminate the federal budget deficit within ten years by reducing spending growth. This has been a politically necessary goal, as some fiscally conservative lawmakers have opposed a budget plan that does not reach balance.

And while in the past such discussions between Democrats and Republicans have been the source of much consternation, infamously leading to the US government shutdown of 2011 and subsequent US downgrade, this year's budget plans will be even more difficult to put together.

He gives the following three reasons why:

  • First, the projected deficit at the end of the ten-year period that Congress uses for fiscal plans is slightly larger.
  • Second, Republican leaders will need to make room in the budget for tax reform and increased infrastructure spending, unlike previous budget proposals.
  • Third, more of the budget appears to be politically off-limits to proposed cuts than in the past.

As Phillips summarizes, over the next few months, the Trump Administration and congressional Republicans will need to demonstrate how they will piece this puzzle together; the President may submit an abbreviated budget to Congress within the next several weeks. More importantly, Congress will need to pass a budget resolution in order to lay the procedural groundwork for tax reform, which will require that they lay out a fiscal plan for the next ten years.

Goldman takes a middle path, concluding that it expects an eventual agreement that accommodates some of these new priorities while still achieving balance. "However, reaching this eventual agreement is likely to be a political challenge and is likely to be an early indication to financial markets that a large fiscal stimulus will be difficult to achieve in light of fiscal constraints."

This, incidentally, is what JPMorgan's trading desk has been warning for nearly two months, cautioning that "the market’s focus will likely turn back to the precise scope, timing, and structure of the Trump/Ryan fiscal/regulatory agenda."

Considering the S&P closed on Friday at new all time highs, this moment has yet to pass, and Goldman and JPM's warnings have yet to be heeded by traders.

In any case, for those wondering why Goldman continues to temper expectations for a major fiscal breakthrough from Trump, here is the full report.

From Goldman's Alec Phillips

Fiscal Constraints on the Political Agenda

Spring marks the start of budget season in Washington, and the upcoming process looks likely to be more difficult than usual, as congressional Republicans try to accommodate new policy priorities while facing greater political constraints. Over the last several years, Republicans in Congress have supported significant spending cuts in the annual budget resolution that Congress traditionally uses to guide fiscal decisions for the coming fiscal year. These spending cuts have been used to demonstrate a balanced budget by the tenth and final year of the projection. Doing so has become politically necessary as some conservative lawmakers are likely to oppose a budget plan that does not reach balance.

While the annual budget resolution is often seen as symbolic, this year’s will be more significant as it will lay the institutional groundwork for tax reform and potentially infrastructure legislation, which cannot pass until after the budget resolution does. Exhibit 1 contrasts the Congressional Budget Office’s (CBO) recently released baseline deficit projection with the FY17 budget resolution that passed the House Budget Committee last year.

Exhibit 1: A wide gap between projections and plans

Source: Congressional Budget Office, House Budget Committee

In recent budget resolutions, spending cuts have done essentially all of the work in achieving projected balance by the end of the ten-year period. While this strategy looks likely again this year, Republican leaders will face three new challenges.

  • First, the baseline budget deficit they will be trying to eliminate is slightly larger than last year, mainly because the 10-year budget window has rolled one year forward in a period of widening budget deficits. The CBO projects a deficit at the end of the current 10-year projection period of 5% of GDP.
  • Second and more importantly, budget plans will need to accommodate new political priorities, particularly tax reform. The Urban/Brookings Tax Policy Center estimates the revenue effect of the House Republican Blueprint on tax reform at roughly $2.5 trillion over ten years, including their most generous estimate of macroeconomic feedback on revenues (“dynamic scoring”). This is equal to nearly half of the primary spending cuts that House Republicans proposed last year to reach a balanced budget by 2026, and would increase the deficit by 0.9% of GDP by the end of the 10-year budget window. Since the border-adjusted tax (BAT) proposal in the House Republican plan raises an estimated $1.2 trillion over ten years in revenue, the low probability in our view that eventual tax reform legislation will include it suggest that fitting a substantial corporate tax rate reduction could be even greater.  President Trump has yet to make a specific proposal on infrastructure, but the proposal released by his advisors shortly before the election would authorize another $140bn in tax credits, and would add another 0.1% of GDP to the deficit in ten years.
  • Third, it is difficult to see how congressional Republicans can propose the same spending cuts they did last year in certain areas of the budget, in light of changed political circumstances. Last year’s budget resolution proposed reducing Medicare spending by $450bn over ten years (0.4% of GDP by the end of the budget window), but President Trump campaigned on a position that Medicare and Social Security should be left largely unchanged.

A more substantial source of previously proposed savings is the repeal of benefits under the Affordable Care Act (ACA). However, President Trump has insisted that he intends to replace it with a new program that maintains or increases coverage levels, as have some congressional Republicans. Last year’s Republican budget assumed the savings from repealing (but not replacing) ACA benefits, a difference of around $2 trillion over the next ten years, or around 1.2% of GDP by the end of the 10-year budget window. Exhibit 2 shows how the spending cuts proposed last year would reduce the baseline budget deficit in FY2027 and how much might be offset by new policy considerations.

Exhibit 2: Reaching balance after ten years is harder in light of new political priorities and constraints

Source: Congressional Budget Office, House Budget Committee, Goldman Sachs Global Investment Research

In theory, these additional costs could be offset with savings elsewhere in the budget. However, these cuts would be very deep as a share of projected spending in those categories. Exhibit 3 presents a scenario in which Medicare is considered off limits, savings from the ACA are not counted because they would need to be redirected into new benefits for those currently covered, and defense spending is kept at the same slightly increased level as last year’s proposal, and cuts in the remaining areas are scaled up proportionately to achieve balance while covering the cost of the tax cuts and infrastructure spending.

The upshot is that Medicaid, non-defense “discretionary” spending (funds appropriated by Congress for purposes other than defense) and other “mandatory” spending (income support programs, federal and military pensions, and veterans’ benefits) would need to be cut by between 50-80% to achieve a balanced budget within the next ten years. We are skeptical that a budget resolution that proposes cuts of this size could win the 51 votes necessary to pass in the Senate.

Exhibit 3: Large concentrated cuts are improbable but would be necessary to reach balance within political constraints

Source: Congressional Budget Office, House Budget Committee, Goldman Sachs Global Investment Research

This dilemma might be resolved by a combination of three things.

  • First, it is possible though unlikely that congressional Republicans might abandon their goal of a balanced budget within ten years. Fiscal conservatives are likely to vote against a budget proposal that does not eventually achieve balance, which could sink the effort since no Democrats are likely to vote for it.
  • Second, entitlement reform might be on the table after all, at least as far as the congressional budget process is concerned. While we expect changes to be made to the Affordable Care Act, we are skeptical that Congress will make meaningful changes to other social benefit programs like Medicare this year or next. That said, it is difficult to see how congressional Republicans will put together a credible budget proposal that achieves balance within ten years without proposing changes in this area.
  • Third, tax cut plans might be scaled back. Compared to the roughly $3 trillion “static” cost of the House Republican plan, our expectation is that Congress will ultimately enact a tax cut of around $1.75 trillion over ten years, which would probably show up in official projections as well under $1 trillion once “dynamic scoring” is applied and various adjustments to the budget baseline are taken into account.

We note that the budget resolution that congressional Republicans will release in the next couple of months—the normal timing is early March but this looks likely to be delayed due to the ongoing debate over ACA reforms—does not become law, so congressional leaders will have some flexibility to propose policies that have a low probability of actually taking effect. That said, some aspects of the budget resolution will be quite important since the levels set in the budget outline that Congress adopts this spring will govern consideration of tax reform and potentially infrastructure legislation. If those bills exceed the limits in the resolution, they could lose procedural protections and could require 60 votes (and therefore Democratic support) in the Senate to pass.

* * *

Finally, here are the clues to look for over the next several weeks to see how Trump's agenda is progressing.

  • February 28 – State of the Union Address: President Trump seems unlikely to go into much detail, but his comments on the broad aspects of some of the issues discussed above could shed light on the administration’s general approach.
  • March – President’s Budget? White House officials continue to indicate that some type of budget proposal will be released in the next few weeks. This looks likely to touch on tax reform and infrastructure, but it is unclear whether it will constitute an abbreviated budget that presents a summary across all areas of the budget, similar to what other new presidents have proposed, or whether it will include proposals in just a few areas.
  • April – Congressional budget resolutions: As discussed above, Congress traditionally approves (or tries to approve) a budget resolution by April that includes spending and revenue levels for each of the next ten fiscal years. This resolution is also likely to include “reconciliation instructions” for tax reform, which is the only way that legislation can pass with 51 votes in the Senate. While the resolution itself does not have the force of law—the President never signs it—it must pass before tax reform legislation can begin to move forward.

Normally the first iteration of the budget resolution is released in the first or second week in March, but this year’s process might begin slightly later due to delays in considering ACA repeal legislation, which for procedural reasons needs to be largely concluded before the budget process can begin.

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Nona Yobiznes's picture

What the hell are they playing at? Clearly there is a rift between the Golmanites in Trump's cabinet and the bank itself. Perhaps Trump really is in control of economic policy? All of this back-and-forth is getting incredibly hard to follow.

BlueHorseShoeLovesDT's picture

Misdirection: the mind believes what the eyes see and the ears hear.

Oracle of Kypseli's picture

Trump may change tactics if he sees that he is being torpedoed.

Soon we will see some heads roll. Many traitors in the ranks.

brianshell's picture

We have all had some time to prepare a list of people to fill the financial roles. Goldman Sachs is not on the list. Help me with names and the reasoning. First, I don't care if they have thrity years of banking experience. Look at the spider web spreading out from the Fed window and block all the players entrenched on these lists.

evoila's picture

What better outcome for Goldman than to tank the market with it's people inside. If this isn't a setup, I don't know what is. I said before that this is the greatest shorting opportunity in a decade, and everybody laughed. Do nothing, and you won't be laughing 12 months from now.

JamesBond's picture

Open letter to Abe

Don't get a politician to tell you what and why Trump says and does what he does... get a businessman to consult about another businessman.

Rainman's picture

Be not afraid, citizen ... The King of Debt is large and in charge !

All Hail The King !!

max2205's picture

Whatever the plan is put it next to Obama s and compare .... Obama did NOTHING....

August's picture

Ever larger portions of the US budget are "politically off-limits" to cuts.

So yeah... default it will be.

dogmete's picture

Heh. Everything is off limits to cuts. Trump won't even cut the Endowment for the Arts which is just plan taxing the poor to entertain the elites.

brianshell's picture

Trump has two choices. He either can write off the debt to the federal reserve company as onerous debt, or issue United States Notes and pay off the Fed over 5 years whereafter the Feds charter will be revoked, while at the same time increasing the fractional reserve requirement for all banks by 20% per year until it reaches 100% where it will remain by law.

Only congress has the constitutional power to issue money and regulate the quantity thereof. They do not have the authority to delegate that power to a private company. Especially to one who issues debt based money.

Onerous debt is illegal. That is a precedent thousands of years old. The federal reserve company has charged onerous debt to the people of the United States since 1913. The 1913 dollar is now worth 3 cents. The other 97 cents is onerous debt and considered null and void. Lawyers could easily add all lost income that the people of the United States could have earned sans this onerous debt burden.

Nona Yobiznes's picture

At this point, a jubilee is the only way to recover. We're way past working within the system to reform it. Zero out the onerous debt, issue a new, interest-free currency, abolish the Fed. Trump NEEDS to do something like this. It won't be a smooth transition, but it's going to be a hell of a lot better than continuing with this system of fraud. 

brianshell's picture

So back to the specific candidates that Trump should recommend for Secretary of the Treasury and other key positions.

Names, I need names and the reasoning.

GoinFawr's picture

Bill Black for AG!

And Tyler Durden for TS.

THe reasoning should be apparent, on both counts.

new game's picture

3 points: cuts, plain and simple. accross the board, say 10 percent.

secondly, reform taxes and end up with higher tax revenues.

goal, one trillion dollas, just to balance the monstrosity.

third, deal with unfunded liabilities, somehow, someway.(snicker, quite laugh)

summation:won't happen.

result of summation, l o fucking l.

Got The Wrong No's picture

Trump may try to pull off some king of a restructuring of debt. Before he does it he will run it up to the limit. Just as with a credit card. If you are going to default you run it up to the credit limit before you do. A default is a default. 

BlueHorseShoeLovesDT's picture

Trump never should have brought up the idea he had too many Goldmanites

flaminratzazz's picture

Goldman Sachs Goldman Sachs Goldman Sachs

the world is owned by

Goldman Sachs

Ye goyim are soooo fvked. Bow down to the REAL GOD Ye heathens.

Praise and worship


Goldman Sachs

angry_dad's picture
angry_dad (not verified) flaminratzazz Feb 12, 2017 6:32 PM

As long as TRUMP says "NO BAILOUTS" these crooks can be kept under control

dogmete's picture

That's not what he said 8 years ago. He was on TV saying gotta give 'em bailouts or else.

GoinFawr's picture

Like his former distaste for the electoral college, maybe that's changed now too!

new game's picture

when the bankers come knocken, he will fold like a cheap lawn chair...

Grandad Grumps's picture

Goldman, as one of the owners of the Federal Reserve bank and one of the criminal globals banks should know exactly how they are going to derail Trump.

flaminratzazz's picture

Make no mistake, these bastards can bring down lightning from the heavens.. Praise and Worship

Goldman Sachs

847328_3527's picture

Are they implying the Losers, Democrats won't shake hands with the winners, Trump, and cooperate?

marathonman's picture

The Dems and Repubs may be two wings of the same vulture but no one ever thought it flew all that gracefully.

new game's picture

nice! so we are the carcass>peck at a tyme...

whatamaroon's picture

OT, but it looks like Gov. Jerry Brown finally recognizes Trump as the President as he askes for Fed. fiat for all the rain and subsequent havoc it's causing;

Got The Wrong No's picture

I said a few weeks ago that their leaving the Union talk would vanish with the first natural disaster. That didn't take long. Trump now has a bargaining chip. Sanctuary Cities? Let's Talk

August's picture

Long Coronal Mass Ejections.

djrichard's picture

Remember how after the housing bubble collapsed, the #1 big concern on everybody's lips was ... the deficit?   [Edit: have to laugh.  My first though when I saw people going nuts flipping homes was, "yep this is going to blow up, and when it does, we're going to have to have the Fed Gov tighten the spigots." ] Enough people rallied around that flag to put a stop to fiscal policy.

It worked back then, let's do it again.  Goldman Sachs has the option to advise that balancing the budget is insane for a Fed Gov.  But why do that when they can merely sit idly by and watch the outcome unfold again as last time.  Thereby tie up Trumps hands and watch his administration disillusion his base.   Just like GS did to Obama.

new game's picture

and what is to stop qe forever? balance sheet it. but then there is the maff, hmmm.

50 trillion is a nice round number. digital treasuries, digital fiat, all good if everybody complies and believes.

debt slaves, but please, just give me my cut and i'll be a good slave...

frank further's picture

Remember, Trump said "restructuring", aka default, for US debt is a good plan.  Worked well for him and his businesses, stiffing creditors.

19April1775's picture

You mean instead of taking taxpayer funded bailouts?  I'll take Trumps side on that.  That is how the real world works.

new game's picture

anybody checked with china on this great idea?

Got The Wrong No's picture

They have their own set of troubles. I expect a World wide break down and a ride in on a white horse IMF, to the rescue bail out, to complete the Globalization Slavery. Game Over

JailBanksters's picture

That's why Trump has an Insurance Policy and moved Goldman Sachs to the Trump Manor


angry_dad's picture
angry_dad (not verified) Feb 12, 2017 6:29 PM

Anyone with a single functioning brain cell can see that wall street loves the status quo

Over the last decade, they learned how to play both sides of every trade, rig the media, and receive obscene bailouts

They never lose and investors never win.

itstippy's picture

President Trump could get 100% of his fiscal plans enacted and it still wouldn't come close to returning the U.S. economy to the post-WW2 growth years of 1945-1975.  In the ensuing 40 years we've tried and dreamed of returning to that type of growth, but it just doesn't happen.  Why not?

1) Ever-increasing legacy debt burden

2) Global competition in manufactured finished goods

3) Population demographics

4) Resource depletion

If by "Make America Great Again" people think "Return to the economic growth and promise of 1965" they're deluding themselves.  It just isn't possible.  Trump supporters' expectations are way too high, just as Obama supporters' expectations were way too high in 2008.

Got The Wrong No's picture

Except one wants to build the other wanted to destroy. Granted, we are expecting too much. I'd settle for making America better than it is now. Hopefully, a whole lot less corrupt. 

wide angle tree's picture

The source of all money is the Federal Government. The idea that a balanced budget is desirable is the same as seeing benefits of eliminating the money supply completely. The Federal Government has put in place the rules we play by and is responsible for the outcome. The question is does the system achieve goals that benefit the people. Ideally the people should be able to afford food, shelter, education, and health care with no government assistance. This would require jobs that pay more, and costs that decrease.

Actual reform of the health care industry would reduce costs dramatically. Either the forces of free market competition are unleashed or the government has to start mandating price controls. There is no way the current system can be funded for much longer.

On corporate taxes there shouldn't be any cuts with out offsetting tariffs to promote creating jobs and income. A $500 billion trade deficit may look profitable to these companies now, but it is being funded by the government enabled debt creation.

grizfish's picture

There are only two targets Trump needs to attack if he intends to reduce the federal budget defecit.  Reduce payments to the MIC (military industrial complex, as a definition for the snowflakes) and provide equal aid to all citizens, regardless of race, color, or creed.  I have had enough of preferences for illegal immigrants and colored people.

fbazzrea's picture

but it is being funded by the government enabled debt creation.

it is being funded by enslaving future generations of Americans.


grizfish's picture

I realize that history has been changed.  Especially in our educational system.  But you need to investigate the inception of the FED.  Why was it created?  Who were the creators?  Who benefits from powers gained by the FED?

The FED is not a government institution controlled by the Executive, Judicial, or Congressional branches of the U S of A.  They are an independently owned organization that is in complete control of US financial policy.  They have destroyed scores of sovereign nations with their financial power.  They are not operating in the best interest of the U S of A.

Rabbi Blitzstein's picture

Goyim gevalt. Rabbi here to help. Three things simplified. (((Goldman Sachs))), (((Federal Reserve))), (((Mafia))). Any questions? LOL!

TAALR Swift's picture

The 3 things that TAALR has concluded that might derail Pres. Trump's Fiscal and Political plans:

Banksters, Gangsters and Wanksters.  

In any combination at any given time.

ilovetexas's picture

Ahaha, so Goldman says market is in trouble. It's time to pile in, folks! Goldman is always a good contrarian indicator.