The combination of a Donald Trump presidency and a Republican House and Senate means that many, and perhaps all, of the brakes that have limited economic policymaking in Washington the past 8 years will be removed in the next Congress.
GOP control of the White House and Congress means that the congressional budget process that had been abandoned on Capitol Hill will be the vehicle for major tax reductions and spending increase the next few years.
Although there may be some resistance from the House Freedom Caucus over the spending that isn’t offset, the Trump budget policies could increase the federal deficit to between $900 billion and $1 trillion a year by fiscal 2018. Federal national debt held by the public could quickly rise to 90% or more of GDP.
In fact, the congressional budget process is the ideal legislative vehicle to enact much of the Trump economic program. By law, a congressional budget resolution cannot be filibustered in the Senate, so the Republican majority there should be able to pass a fiscal blueprint and then compromise it with the one that will likely be adopted by the smaller but still substantial GOP House majority.
Passing a budget resolution will then enable Congress to use the long moribund reconciliation process to do everything from tax reform, to major tax cuts, to repealing a substantial part of the Affordable Care Act, to significant increases in military and infrastructure spending. President-elect Trump supported all of these during his campaign.
Any combination of these policies, or even moderated versions of these policies, would put U.S. fiscal policy directly at odds with the Federal Reserve. The higher deficit would be stimulative at the same time the Fed is expected to continue to implement a mildly restrictive monetary policy by slowly but steadily raising interest rates.
The Fed could decide to raise interest rates faster and higher in response to the Trump fiscal policy, and that would raise federal spending on interest on the national debt (and increase the deficit) even further as previously low-cost short-term Treasuries are re-borrowed at the suddenly much higher rates. Indeed, interest on the national debt may well be the fastest rising part of the federal budget during the Trump administration.
As it has in the past, a large external economic, military or foreign policy shock could change this outlook. For example, as it did during the Clinton administration in 1993, the bond market could threaten to push interest rates to politically unacceptable levels in response to Washington’s much-greater borrowing needs.
But given the crisis fatigue that has set in over the past decade and a half in the United States, the intensity of the just-completed election campaign and the Trump administration’s probable desire to implement its plans quickly, the shock will have to be quite substantial to derail the economic policy changes that now seem almost certain to move forward.
Stan is an Executive Vice president in Qorvis MSLGROUP’s Washington, D.C. office and Director of Financial Sector Communications in the United States. He can be reached at email@example.com and 202-683-3131. Follow him on Twitter at @thebudgetguy