Evercore ISI: "Trump Budget Not Happening"

In a note by Evercore ISI"s Terry Haines and Ernie Tedeschi, the analyst duo pours cold water on Trumps" budget proposal before it has been even formalized and confidently predicts that "Trump budget not happening" adding that the most likely outcome is that "Congress will modestly hike defense and non-defense spending."

Below is a summary of their thinking:

President Trump"s budget will not be submitted to Congress for a couple of weeks but already the speculation about it has begun with press stories about deep cuts to domestic spending used to fund increases in defense spending. Investors should understand that any president"s budget submission is inherently a political document; that Congress is not bound to follow it; and that this Congress will not follow it. We continue to see the likely result of the federal budget process as a continuation of the modest increases in both defense and nondefense discretionary spending agreed to on a bipartisan basis over the past four years. Any increase in defense spending is likely to be small and matched by similar small increases in nondefense spending.

Presidents are bound by law to submit an annual budget request. This is supposed to come in early February but new presidents always are given leeway. The Trump budget will come in a couple of weeks: the current and usual step in the process is to provide draft budget numbers to federal departments and agencies for views and pushback. When the budget is submitted, Congress holds hearings, develops its own budget numbers, and ultimately agrees on a budget by approving a budget resolution. This budget resolution guides Congress in its appropriations process and in the reconciling of changes in law to the budget (in the FY 2018 case, tax reform). Importantly, the president does not sign the budget resolution as it is not a law.

Moreover, what we know about the president"s proposal is merely a 30,000 foot target: an increase in defense funding of $54 billion this year (about 10 per cent), entirely offset by an equivalent cut to nondefense discretionary (that is, non-entitlement) funding. From a macro perspective, that means there will be no net stimulus from this defense hike. There is little to no detail about how either the defense hike or the nondefense cuts would be distributed across departments and programs because very likely those decisions have not been finalized yet. Over the next couple weeks, the details will be fleshed out internally at the White House before the budget"s release. Administration officials have pointed to foreign aid and the EPA as the targets of cuts, but neither spends enough money to shoulder the entire burden of the proposal.

And some follow up thoughts on the substance, what little there is, of the proposal:

• The president"s budget is a couple of weeks away from being finalized and submitted; during that time, department heads will have an opportunity to respond internally to the budget ideas and develop specific ideas for meeting the targets.


• The proposed $54 billion increase in defense spending in FY2018 is equivalent to a 10 per cent hike in the cap on defense spending that current applies. This would be only slightly higher on a per-year basis than the defense hikes that resulted from the last two-year budget deals in 2013 and 2015 (the Ryan - Murray-style deals) but not dramatically. Some congressional Republicans such as Sen. McCain (R-AZ) are pushing for even larger increases in defense spending.


• Since the $54 billion is a topline goal, there is no detail yet about how within the DoD the president is proposing distributing the funding (e.g., between procurement, operations & maintenance, etc.)


• The $54 billion surge in FY2018 defense spending is to "budget authority" (funding). This translates to "outlays" (money spent out) on a lag; generally, only about half of an increase in defense funding is actually spent out the first year.


• Because of this lag in actual spending, and because it is offset by countervailing cuts, this proposal would likely have negligible macroeconomic impact.


• The White House has promised not to touch entitlements such as Social Security and Medicare, so the defense hike is being paid for entirely by cuts to nondefense discretionary spending. The $54 billion is equivalent to a 10.5 per cent across-the-board reduction in nondefense discretionary spending, though it is not likely being applied evenly across the board.


• The White House has mentioned two specific targets of cuts: foreign assistance and the EPA. Note that all foreign aid spending, including military aid and including to allies like Israel, only comes to $42.4 billion. EPA"s funding in FY2017 is expected to be about $8.3 billion.