Mnuchin Manages Expectations On Tax Reform; Warns Trump "Not Touching" Entitlements

'Good cop' Mnuchin appeared to play expectations-manager this morning in an interview with FOX's Maria Bartiromo. After confirming the Trump administration is "not touching" entitlement programs, and having said this week that tax reform is expected by August,  he appeared to walk back that hype by saying that President Trump "will be touching on tax reform" during his speech to Congress this week, which Reuters notes, is not an official "State of the Union" address.

On Thursday, Mnuchin promised tax reform before August...

But speaking today to Fox's Maria Bartiromo, he seemed less optimistic on the timeline...

The Trump administration is "not touching" entitlement programs such as Social Security and Medicare "for now," Treasury Secretary Steven Mnuchin says.

"Don't expect to see that as part of this budget, OK," Mnuchin says of entitlements. "We are very focused on other aspects and that's what's very important to us. And that's the president's priority."

Donald Trump "will be touching on tax reform" in Tuesday's speech to Congress. "The President is very, very focused on us getting back to sustained, long-term economic growth," Mnuchin says. As Reuters notes,

The plan will reduce the number of tax brackets for individuals and offer a "middle income tax cut," Mnuchin said. On the business side, Trump wants to "create a level playing field for U.S. companies to be able to compete in the world."


Mnuchin said Trump was looking at a "reciprocal tax" that would help create more parity with other countries. Trump administration officials have complained that many countries charge value-added taxes on imports while exempting exports from taxation. The United States mainly taxes corporate income.


But Mnuchin again said he was only studying a House Republican border tax adjustment plan that would levy a 20 percent tax on imports to encourage more U.S.-based production and exports. That plan aims to raise more than $1 trillion in revenue over a decade to offset lower tax rates for businesses.


"So let me just say this is something we are studying very carefully," Mnuchin said. "There are certain aspects that the president likes about the concept of a border-adjusted tax, there are certain aspects that he's very concerned about."


He added that the Trump administration would work with the House of Representatives and Senate to craft "a combined plan that takes the best of all of this when we bring it forward."

Mnuchin says the "absolute lower tax rate" favored by the Trump administration "doesn’t necessarily mean" a corresponding drop in revenues.

Mnuchin did not back off from the Obamacare plan as a priority over tax reform but stated "they are both big priorities" noting that "we need some more time to get tax reform done," suggesting his more aggressive August deadline was perhaps a little optimistic.

As Barclays notes, this week's first major policy speech should provide clarity on whether the US administration’s lack of detail on potential changes to trade and fiscal policies is a reflection of changing policy priorities. Elsewhere, growth outlooks in Europe and Japan remain positive.

US: distraction or policy choice?

The US administration appears to be in no hurry to introduce tariffs or other restrictive trade policies on China or Mexico; together, these countries account for about 30% of US imports. Likewise, on the other major policy items – the government’s public investment programme and tax reform – specificity is lacking. While there have been some hints about the type of corporate income tax reform that the administration might deliver – a broadening of the base and cuts to the tax rates – markets are still waiting for the 2017 key draft fiscal budget. Markets will be attentively watching next week’s State of the Union address (28 Feb). We think that the presentation to Congress will be a good opportunity for the President to more clearly flesh out his policy priorities and goals, especially on trade, taxes, and public investment.

We believe that the policy focus needs to move away from immigration and health care toward fiscal policies if the administration wants to deliver on tax and spending policies that could boost economic activity in the current calendar year. Absent any re-prioritisation of policy in the very near term, we believe investors should re-orient their view on tax reform to 2018. Delays in a possible fiscal boost would make the 2017 government’s growth target of c. 3% challenging (Barclays forecast: 2.5%). For now, our policy baseline remains a combination of anti-trade policies in the form of tariffs against Mexico and China and expansionary fiscal policy that provides a boost to economic activity later this year, but we acknowledge that the probability of our baseline materialising has fallen substantially in recent weeks.