USA: Trump secures a bridging solution, but where does that leave a sustainable fiscal policy?

The 45th President of the United States does not have a great amount to show for his first nine months in office. It remains wholly unclear whether a far-reaching tax reform – as announced not just during the electoral campaign, but also on numerous occasions by President Trump over the last few weeks – will ever materialize. Moreover, the abolition of Obamacare, which he expressly promised the American electorate during his campaign, has clearly failed to make it past the necessary parliamentary bodies. Given this backdrop, it is all the more pleasing that the threat of a US debt default has been averted, at least for now, thanks to a bridging solution agreed just after the US congress members returned to Washington from its summer break.

The absence of the traditional game of brinksmanship pursued by both parties right up to the last minute, a spectacle that we have witnessed in the past, should no doubt be viewed in the context of the hurricane disasters. After all, the mid-term Congress elections are set to be held in the fall of next year. When the corresponding electoral campaigns kick off in early 2018, no politician is likely to want to be tarnished with the reputation of a “spoiler”, potentially responsible for delaying payment of financial aid or the salaries of federal employees. Viewed in this light, the latest bridging solution comes as no surprise to us.

In other respects we will now probably see the usual process of haggling between the two parties take place over the coming weeks, to the detriment of the government finances. We think it unlikely that any restriction will be placed on the ever-increasing government budget, as a fundamental driver of developments is the fact that each political camp will want to claim a victory for itself after the event. However, the President could use the Republicans’ comprehensive majority on Capitol Hill to initiate a far-reaching tax reform, together with a fiscal policy strategy geared towards the longer term. The robust US economy and healthy labour market situation certainly give him enough room for manoeuvre to do this. US government debt now stands at some 115 percent of economic output, more than double its level back in the year 2000. The Congressional Budget Office (CBO) is forecasting an ever-widening gap in the federal government budget from 2019 onwards, based on the assumption that there will be no changes to US tax legislation and no change in expenditure behaviour. Countermeasures need to be taken here – and not in the form of short-term solutions aimed at steering round the closest obstacle, however appealing that option may be against the backdrop of temporal and financial pressure.

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