Key points:
President Trump delivered an address to a joint session of Congress
Broadly this was policy-lite, reiterating key themes, but adopting a more optimistic and inclusive tone.
Tax reform: reduced corporate tax rate, “massive relief” to middle class, did not rule out border tax adjustability.
Budget will remain a challenge with tax reform, military spending and potentially infrastructure spending all vying for funding.
“Repeal and replace” Obamacare risks draining momentum for tax reform.
President Trump addressed a joint session of Congress. CNN – a key critic of the new President – described the speech as more optimistic and suggested this reached out to a wider group of people. That said, the speech maintained many of the ‘core’ themes of controlling immigration; rebuilding the US economy and infrastructure; and fair trade, not free trade. Overall the speech was light in policy direction. We pick-out key economic policy specifics below, but Trump gave little steer to timing or direction of policy.
The most market relevant policy is likely to be on the budget and tax reform. Last night Trump reitereated that he was going to deliver a reduced corporate tax cut and “massive tax relief for the middle class”. Intriguingly Trump talked about delivering a “level playing field for American companies” discussing US companies paying tariffs and taxes on exported goods, but the US charging foreign companies “almost nothing”. Trump did not use the words, but this discussion alongside tax reform suggests that the proposed border tax adjustability as part of a fundamental reform of US corporate tax reform has not been ruled out.
Trump also spoke about a budget that would “rebuild the military” and “eliminates the Defense sequester”. This coincides with the news that Trump is seeking a $54bn increase to military spending in this year’s budget. Trump also reiterated that he will ask Congress for measures to boost infrastructure spending by $1trn – to include both private and public funding. The combination of these measures suggests spending in other areas will have to be cut back in order to avoid a significant deficit (stimulus) and potentially difficulties in Congressional approval both with Republican deficit hawks (and potentially with Senate Democrats if the proposal were to contravene the budget neutrality required for a reconciliation motion).
Trump also discussed the “repeal and replace” of Obamacare. He identified a number of building blocks that he would seek in an Obamacare replacement scheme. These included, coverage or pre-exiting conditions, private purchases encouraged through tax credits/health savings accounts; State flexibility over Medicaid; buying insurance across state borders; and control of insurance and drug costs. These building blocks appear broadly in line with discussed measures. However, we fear that the replacement of Obamacare will be a lengthy process that could stall progress on tax reform.
In terms of trade, Trump did discuss walking away from the Trans-Pacific Partnership (TPP), the loss of manufacturing jobs since joining NAFTA, and the closure of 60k factories since China joined the World Trade Organization (WTO). However, we think it was telling that he made no specific policy points with regard to trade and discussed ‘levelling the playing field’ only in the context of corporate tax reform.
Additionally, Trump discussed building “the Wall”, which he said would help protect the US against drugs and crime. He discussed controlling immigration and focusing more on merit-based immigration to reduce low-skilled immigration.
In summary, Trumps speech kept most of the options that we have been considering for US policy developments on the table. This failed to narrow either the scope or the timeframe for policy developments. We continue to be concerned that the replacement of Obamacare will be the key priority and that this may reduce momentum for corporate tax reform. We expect a more substantial policy position on Obamacare before the end of the month and Trump has promised greater clarity on tax reform over the coming weeks. The coming month should see the start of preliminary budget discussions as the debt ceiling waiver expires on 15 March.
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