Federal Reserve Chair Janet Yellen explicitly mentioned “fiscal uncertainty” in her testimony today at Capitol Hill, having re-iterated a similar statement in December. In simple terms, it highlights the FED’s worries over President Trump’s plans to reform the economy. Yellen testimony highlights a Trump reality check.
We empathise and find very little detail and credibility in his current proposals for tax reform and infrastructure spend when combined with his proposals for reigning-in the national debt.
At the core of his proposals is a direct conflict between his neo-populist statements made in the run-up to the election and his ambitions to reduce the size of the government deficit. Populist policies typically involve an increase in government spending, the Committee for a Responsible Federal Budget have estimated if President Trump were able to enact his spending in full the US could see government gross debt rise from US$14tr today to US$35.2tr by 2026. We estimate this would push the federal budget balance to -7% of GDP, well above the average since the 1970’s of 2.3% and close to the highs seen during the 2009 credit crisis.
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According to the Committee for a Responsible Federal Budget, four fifths of this increase in spending would be attributable to spending on social security, federal health spending and debt interest costs. In fact, to achieve a budget balance spending would need to be cut by US$6.5tr over the next 10 years, which seems a world apart from President Trumps spending plans.
In short, his proposed cuts amount to simple political theatre as they are unlikely to reduce the government debt burden by much, whilst his proposed spending plans are likely increase the government deficit substantially.
Either way, the reality check for Trumpism will be soon, with many expecting a skinny version of his budget to be announced at his scheduled address to a joint session of Congress on February 28th (We expect the “Green Book” detailed version in May). With the US debt a continued problem, expect a heavily watered-down version of President Trump’s election pledges. Yellen testimony highlights a Trump reality check.
James Butterfill, Head of Research & Investment Strategy at ETF Securities
James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments.
James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.
