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Trump speech to Congress
Long on vision, short on details

  •  Trump repeats many campaign promises, but provides few details on the specifics of policy changes
  •  Tax reform and infrastructure spending, in particular, were mentioned only briefly; market impact limited, in our view
  •  Some details on Obamacare and immigration reform, but no direct proposals for legislation

 

Few details offered on tax reform or infrastructure spending :

Big set-piece speeches by the President to the Congress are often long on vision and short on details. If the financial markets were looking for new, detailed, information about tax reform or infrastructure spending in the President’s speech last night, they were probably disappointed.
On tax reform, President Trump said that his “economic team is developing historic tax reform that will reduce the tax rate on our companies so that they can compete and thrive …”, but there were no details about tax changes that have been recently discussed in Congress such as the disallowance of net interest deductibility, expensing of capital outlays, territorial versus a worldwide tax system, border tax adjustments, et cetera.

On infrastructure spending, Mr. Trump said only that he would ask Congress to approve legislation that produces USD1.0trn in infrastructure investment – financed through both public and private capital. This is not necessarily a request for USD1.0trn in federal spending. Nor was any timetable mentioned on when the infrastructure spending would take place.

President Trump’s suggestions for the reform of “Obamacare” generally conformed to many of the proposals in the “Better Way” blueprint put forward by the House Republican leadership. The blueprint leans heavily on tax credits and Health Care Savings Accounts rather than direct subsidies to purchase health insurance. Trump also hinted that he would support Better Way proposals to shift the Medicaid program
to a per capita cap or to a block grant system.

One new twist was a suggestion that he would work “to bring down the artificially high prices of drugs.” This is a proposal that is usually associated with Democratic Party officials and is not something that one often hears from Republicans.

As expected, President Trump endorsed higher levels of military spending, but he did not propose any specific increase in the defense budget. We will have to wait for the release of the Administration’s proposed budget sometime in the next few weeks to learn the extent of potential fiscal policy changes.

Campaign rhetoric redux :

President Trump continues campaign themes, with few details on proposals

Big set-piece speeches by the President to the Congress are often long on vision and short on details. If the financial markets were looking for new, detailed, information about tax reform or infrastructure spending in the President’s speech last night, they were probably disappointed.

Tax reform

During the presidential campaign, Donald Trump offered detailed plans for the reduction of personal taxes and the reform of the corporate tax system. Turning those plans into a legislative proposals that will pass the Congress is likely to be difficult, in our view. Some members of Congress will be opposed to creating new winners and losers in the tax system. Others will be opposed to the potential revenue losses and an increased federal budget deficit. Mr. Trump had an opportunity tonight to indicate the direction he would like to go with tax reform, but he limited himself to brief comments.
The President said only that his “economic team is developing historic tax reform that will reduce the tax rate on our companies so that they can compete and thrive ….” However, he provided no details about where he stood on the potential tax changes recently discussed in Congress, such as border tax adjustments, the disallowance of net interest as a business expense, the immediate expensing of capital outlays, a switch to a territorial versus a worldwide tax system, et cetera. He said “we will provide massive tax relief for the middle class,” but went no further in describing how it would be done or what the impact might be on the federal budget.

Infrastructure

On infrastructure spending, Mr. Trump said that he would ask Congress to approve legislation that produces USD1.0trn in infrastructure investment – financed through both public and private capital. Suggesting that the legislation would “produce” USD1.0trn in infrastructure is not the same as appropriating USD1.0trn in federal funding for infrastructure programs. The President offered no details on how “public and private capital” would be combined to fund infrastructure projects. The implication, in our view, is that federal support for infrastructure will be smaller than advertised and may not be implemented for some time.

Healthcare reform

President Trump called for the repeal of the Affordable Care Act, otherwise known as “Obamacare.” His “guidelines” for reform relied heavily on the proposals in the “Better Way” blueprint put forward by the House Republican leadership. The blueprint proposes shifting away from direct subsidies for the purchase of health insurance to the provision of universal tax credits and reliance on Health Care Savings Accounts. Democrats in Congress are likely to oppose this since it provides less support for lower income families.

Mr. Trump also hinted that he would support the Better Way proposals to completely revamp the Medicaid program, moving it away from unlimited cost sharing between the states and toward a per capita cap or to a block grant for each state.
Republican healthcare proposals generally are tilted toward “free market” solutions. For that reason, President Trump would end the “mandate” that requires every American to be covered by some form of health insurance or pay a tax penalty. However, he did stray from free market orthodoxy by suggesting that he would “work to bring down the artificially high prices of drugs.” This is a proposal that is usually associated with Democratic Party officials and is not something that one often hears from Republicans.

In addition, Mr. Trump proposed to make childcare “affordable,” and to help ensure that parents have “paid family leave.” Again these are proposals that are normally associated with the Democratic Party and not with Republicans. However, the circle can be squared if some current entitlement programs are eliminated to shift funding to new entitlements for childcare and parental leave.

Military spending

As expected, Mr. Trump endorsed higher levels of military spending, but he did not propose any specific increase in the defense budget. We will have to wait for the release of the Administration budget proposals to learn the extent of potential fiscal policy changes.

Immigration

President Trump wants to secure the border and prevent illegal immigration. That has always been clear. He reiterated his plan to build a wall along the southern border. Interestingly, he did not suggest that Mexico would pay for the wall, something that was notable by its omission.
In his speech tonight he offered some new ideas about legal immigration, suggesting that the current system favors low-skilled immigrants and in the process depresses the wages of lowincome Americans and puts pressure on American taxpayers. To correct that, Mr. Trump would ask the Congress to shift to a “merit-based” immigration system, presumably one that would admit higher-skilled immigrants who were more employable. These proposals could limit immigrants who are admitted under family preferences.

Education

The President call upon the Congress to enact an education bill that would fund school choice for “disadvantaged youth.” More funding for education is not something that a Republican Congress is likely to support, but this might be addressed by shifting funds from other education
programs. “School choice” is phrase that is usually associated with a voucher system to pay for non-public education.

Conclusion

All in all, Mr. Trump’s speech gave the financial markets little insight on the scope or extent of his various tax and spending proposals. No specific details were offered. No numbers were mentioned. No timetable was laid out.

Details should be forthcoming, however, in the next few weeks, when the Trump administration presents a budget proposal to Congress. That budget should have specific plans for spending and for the taxes that will support the spending. At that point, the financial markets will have more to go on in assessing the likely effects of the President’s plans for economic growth.

 

Marketing communication : This document has not been developed in accordance with legal requirements designed to promote the independence of investment research and its author(s) is/are not subject to any prohibition on dealing in the relevant financial instrument ahead of the dissemination of the marketing communication.

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