Trump’s budget proposal: Winners, losers, and economic ramifications

Trump’s budget proposal:  Winners, losers, and economic ramifications
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President Trump’s 2018 federal budget proposal has serious long and short term ramifications for the American economy.  

A presidential budget is designed to put into place policies affecting many, if not all, segments of the macro-economy.  In Trump’s case, he clearly designates winners and losers affecting the entire American economy.

Main purpose of Trump’s budget

Trump’s main purpose of his budget proposal is shrinking government’s size.  Based on preliminary analysis, the federal government will shrink in terms of personnel, financial resources, departments, and programs.

This means that there will be layoffs in departments such as the Environmental Protection Agency (EPA) and Education, and a budget reduction of 14 to 30 percent for the Internal Revenue Service (IRS) and State Department, respectively.  But as Trump stated, this will be a military and “public safety budget” since they will see substantial funding increases.

There will also be increases in infrastructure spending as Trump is holding to his promise to spend $1 trillion.  Trump is also playing to his base and keeping campaign promises, promising not to touch Social Security, Medicare, or Medicaid even if it means growing the federal deficit and national debt in the future.

Trump plan winners

The big winners of Trump’s budget proposal will be the Department of Defense (DoD) since it will see a $54 billion increase in financial resources.  Here defense spending will reach close to $700 billion and exceed more than 50 percent of all the federal budget’s discretionary spending.

The problem is that other departments will see drastic cuts and not add a single penny to programs that could help stimulate America’s economy.  The increase in defense spending will roughly equal the annual military budget for the United Kingdom and more than 80 percent of the Russian 2015 military budget. This means that the United States would be outspending Russia by a ratio of more than 9 to 1.  The only positive impact this defense spending increase could have on the American economy is the rise in value in defense stocks such as Lockheed Martin, Raytheon, and Northrop Grumman.

Trump’s budget also projects that funds will be used to increase the Army’s personnel by 50,000 soldiers in order to reach 540,000 while the Navy could put into place a plan to go from 276 ships to 355.  The Navy would purchase more destroyers while commence construction of three nuclear-powered attack submarines per year rather than two.

The problem that most defense analysts see is that under Trump’s plan the United States will be decreasing global involvement, so why is there a pressing need to build more destroyers and submarines?

Graphic: Stockholm International Peace Research Institute (SIPRI)

The share of world military expenditure of the 15 states with the highest expenditure in 2015. Graphic: Stockholm International Peace Research Institute (SIPRI)

 

Sources: Department of Defense and White House Office of Management and Budget. As of February 6, 2017

Sources: Department of Defense and White House Office of Management and Budget. As of February 6, 2017

Adding to Trump’s “public safety budget” will be financial resources toward building the wall along the U.S.-Mexico border.  During his presidential campaign, Trump rallied his base by promising a wall keeping out refugees and illegal aliens from Mexico and the Mexican government would pay for its construction.  However, under Trump’s proposed budget the cost of the wall’s construction would be between $12 to $25 billion without mention of how or when Mexico would pay for it.

Another big winner from Trump’s budget are America’s senior citizens.  In Trump’s budget proposal, while the Interior Department, Housing and Urban Development, and the Agriculture Department take major hits, Social Security, Medicare, and Medicaid, remain intact.  These programs consist of approximately two-thirds of the $4 trillion federal budget and will not see one penny slashed in benefits or payouts to recipients, now or in the future.

Analysts and economists are concerned that unless changes are made to the programs, the federal deficit increases dramatically and the national debt rises another $10 trillion in the next decade.  But Trump has promised to keep these plan benefits intact, thereby placating his base and hurting the American economy in the long run.

Trump plan losers

Losers under Trump’s plan clearly outweigh the winners, with the U.S. economy as the biggest loser.  One key area is basic research funding for civilian science programs.  This means the National Institutes of Health, the National Science Foundation, and the Energy Department’s Office of Science losing significant amounts from their combined $43 billion budgets.  Funds normally going toward research and development for science and technology programs businesses and industries could use would no longer occur.

The EPA’s operating budget would be cut by 25 percent eliminating approximately 3,000 jobs and reducing its total staff from 15,000 to 12,000.  This would hurt programs dealing with air and water pollution and climate change research.

Overall, about 74 percent of the EPA’s annual budget provides grants to tribes, states, and government contractors for clean-up and preparedness efforts.  Without these funds, such efforts to protect public health fall to local municipalities which may not be able to afford them.

Trump’s budget proposal also means that the Commerce Department would see major funding reductions severely hindering its role assisting businesses in selling their products and services overseas.

Trump’s budget presents an economic conflict in American society.  On one hand, older Americans who depend on entitlement programs would be protected since Social Security, Medicare, and Medicaid would not be touched and their economic security remains intact.

On the other hand, younger, poorer people whose livelihoods are shaped and assisted by domestic programs will be seriously hurt as Trump seeks to make drastic and dangerous cuts.  These include the Supplemental Nutrition Assistance program (formerly known as food stamps), the Children’s Health Insurance Program, and the Affordable Care Act (the ACA or Obamacare) resulting in increasing the poor in America and decreasing the middle class.

In the long run, everyone might lose

While there are times when some belt tightening is necessary, the danger is that the reduction may be too radical and do more harm than good.  Under Trump’s planned budget cuts federal spending would see a $10.5 trillion reduction over ten years.  However, the tightening will not be even among all federal departments and if the American economy experiences a recession, then everyone will suffer severe economic repercussions.

Categories: Economics, North America

About Author

Arthur Guarino

Arthur Guarino is an assistant professor in the Finance and Economics Department at Rutgers University Business School teaching courses in financial institutions and markets, corporate finance, and financial statement analysis. The first half of his career was spent in the financial services industry. He has written articles dealing with finance, economics, and public policy.