US budget deficit could take 10 years to resolve

Mick Mulvaney, Donald Trump’s Director of the Office of Management and Budget, is under significant pressure after admitting that the US Federal budget deficit could take 10 years to resolve. This despite the fact that Donald Trump suggested he would immediately eliminate the deficit and potentially pay-off federal debt within just eight years. This is perhaps the first hiccup from an economic point of view since Donald Trump took office. So, why might the US budget deficit take 10 years to resolve?

No economic growth without further spending

There will be areas of the federal budget where Donald Trump will be able to rein in spending to use in other areas. He has already mentioned the healthcare system and US infrastructure as two focal points of his budget spending going forward and this has not changed. The indicative federal budget, which has yet to be approved, would see the federal deficit remaining constant for the foreseeable future. On the surface it does look disappointing that the federal deficit will not be coming down in the short to medium term but what about the long-term?

Why back tracking on a promise could be a master stroke by Donald Trump!
US budget deficit could take 10 years to resolve

Healthcare and infrastructure

As we touched on above, these are two areas which Donald Trump has mentioned time and time again with regards to reform and investment. The healthcare system could be Donald Trump’s largest challenge as he will need to unravel Barack Obama’s healthcare reforms. There are already concerns that any reorganisation along the lines of those discussed in the last few days could see healthcare costs increase significantly for many people.

The situation with regards to infrastructure spending is more straightforward, find the projects, find the money and employ US workers. This has been Donald Trump’s very basic policy since he joined the presidential election campaign. We have yet to see any details of increased infrastructure spending but already we have seen improvements in the US employment market and stock markets hitting all-time highs.

Reckless policies

In a perfect world there would be no federal budget deficit, everybody would be in employment and stock markets would be riding high. The simple fact is this is not possible and while backtracking on a promise to balance the federal budget “immediately” this is perhaps the more sensible option. The only way to cut the federal budget deficit would be to cut back on public services and this would have a detrimental impact upon the economy and sentiment going forward. So, a more staggered approach to reducing the federal budget deficit makes more sense and more importantly will be better appreciated by the investment markets.

We have already seen an array of international PR disasters from the Donald Trump camp and he cannot afford any on the subject of the US economy. While the general press is giving Donald Trump a seriously hard time it is interesting to see US investors believe his policies and they are aligned with his long-term aims. This can all change very quickly but going back on one of his core promises about the budget deficit could be the best move he has ever made!

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