US: Poor fiscal outlook presents a difficult back drop to tax package negotiations – NAB

The US faces a difficult fiscal outlook as despite reductions in recent years, deficits, and debt (already high by historical experience) are projected to start rising soon, explains the analysis team at NAB.

Key Quotes

“Based on current law, the Congressional Budget Office (CBO) estimates that the Federal deficit will start rising from FY 2019, climbing to over 5% by 2027. The Tax Policy Center estimates that, on current policies, the deficit will reach 6% of GDP.”

“In May 2017, the President released his proposed Budget while, in July 2017, the House Budget committee released a resolution on the budget. Both proposals looked to bring the deficit under control by winding back the projected expansion in Federal spending, while not projecting a significant change in revenue (as a % of GDP). This is despite the President’s Budget, and the House Budget committee resolution, calling for substantial tax cuts. While it is unclear how this would be achieved, it is consistent with the stated desire for any changes to be revenue or deficit neutral.”

“This appears contrary to the post-election speculation that a fiscal stimulus was on the way (i.e. an increase in the deficit). This view always rested on the political evaluation that it would be extremely difficult to get agreement on budget savings to fully offset large tax cuts. Failure to pass changes to ‘Obamacare’ highlights this difficulty. While the politics remain uncertain, there appears to be a greater chance that the Republicans will be able to agree on a tax package than health care changes. However, as within the party there are ‘deficit hawks’ (who want the deficit to come down) and ‘moderates’ (who might baulk at severe spending cuts) the end outcome remains uncertain. The in-between path is a temporary rise in the deficit, but with only temporary tax cuts or with spending cuts pushed out in time, so that ultimately it looks like there is no increase in the deficit.”

“Before any tax package can be passed, the Federal government debt limit will need to be raised and funding for government operations will end – both by around the end of September, although if extra funds for Hurricane Harvey relief are passed by Congress this could bring the debt limit deadline forward. Given the major consequences of not raising the debt limit it is likely to occur in time. The greater risk is that Congress fails to reach a deal on funding the government leading to a partial government shutdown.”

“To buy time, the most likely form of funding the government appears to be a short-term fix to extend funding based on the previous year’s level. Ultimately, however, a budget resolution will be needed to enable a ‘budget reconciliation’ process to take place; this would allow passage of any tax package by a simple majority in the Senate. However, getting agreement on continuing and budget resolutions (given Senate filibusters or Presidential veto power) will not be easy with the risk  that demands for or against a particular spending allocation (e.g. for the  wall with Mexico) will cause a stalemate, leading to a shutdown until one  party cracks.”