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Trading  | May 23, 2017

More details of President Donald Trump’s first budget proposal were reported Monday by Bloomberg and Reuters. The leaks add to the picture of what we know about Trump’s budget, which also includes a flurry of leaks published by The Washington Post, the Associated Press and Bloomberg late Sunday, which fleshed out Trump’s plans to slash entitlement spending.

In total, the budget plans to trim $3.6 trillion in spending over 10 years across all discretionary spending and non-discretionary spending lines, in order to enable tax reductions across the board: if enacted – and remember that the president’s budget is just an initial blueprint which rarely passes in its original form – the Trump administration would implement the deepest cuts to government programs in a generation, delivering the opening salvo in a new round of budget battles in Washington.

This is key to balancing the budget by the 10th year.

It also relies on rather rosy growth economic projections,  estimating that U.S. gross domestic product will accelerate to 3% by fiscal year 2020. That’s compared with Bloomberg’s median projection of 2%, and the Congressional Budget Office’s long-term projection of 1.9%. It also expects the 10-year Treasury yield to rise to 3.8% in that time, while CPI increases to 2.3% and unemployment holds more or less steady at 4.7%.

Bloomberg also noted that Trump’s budget been declared dead on arrival by many of his Republican allies in Congress,” so Trump may be headed for another protracted legislative battle.

The full proposal, titled “A New Foundation for American Greatness,” is expected at 11 a.m. Eastern. The proposal relies on a mix of cuts to anti-poverty programs, optimistic economic forecasting and deep cuts to nondefense discretionary funding to meet its targets. It would not touch Social Security and Medicare, which Trump promised to leave alone during his campaign. The budget would also dramatically shift spending to the Pentagon from domestic programs. In 2018, the budget would shift $54 billion from nondefense discretionary spending to defense by enacting major cuts to the State Department, the Environmental Protection Agency, the Department of Agriculture and other agencies.

Here’s a rundown of the latest details to emerge: 

  • The budget will include $200 billion in new funding over 10 years for Trump’s promised $1 trillion infrastructure investment program. The Trump administration has said the money will be used for loans, grants and other ways to secure investment by the private sector and state and local governments, Bloomberg noted. The $1 trillion target incorporates projects, like the Keystone XL Pipeline, that wouldn’t have happened if the administration hadn’t gotten involved.
  • It includes an additional $25 billion budgeted over 10 years to give parents six weeks of family leave.
  • budget also includes plans to sell off half the oil in the US Strategic Petroleum Reserve (SPR), an unexpected announcement which has pressured the price of crude on Tuesday.
  • The Department of Homeland Security’s budget would increase $3 billion, while the Pentagon’s budget would rise $6 billion.
  • Domestic agencies’ budgets will be cut by 10% in 2018 and 40% in 2027.
  • $2.6 billion for increased border security, including $1.6 billion earmarked for Trump’s promised border wall. The other $1 trillion is for aircraft, equipment and surveillance technology, Bloomberg noted.
  • The budget calls for steep cuts to federal workers’ retirement benefits. Per Bloomberg: “Eliminating cost-of-living adjustments for retirees would save $42 billion while increasing required employee retirement contributions would save $72 billion. And the budget would save $72 billion through cuts to Social Security Disability Insurance.”

Bloomberg notes that the budget relies on sweeping tax cuts to strengthen economic growth, offsetting some of the drop in tax revenue. But so far, the administration has provided few details beyond the broad strokes revealed by Treasury Secretary Steven Mnuchin and Chief Economic Advisor Gary Cohn.

Office of Management and Budget Director Mick Mulvaney said Monday that the proposal wouldn’t contain any new information about Trump’s tax-reform plans; even still, the math is a little vague.

The budget proposal, Bloomberg reports, also relies on “several other classic accounting gimmicks,” like this one:

The budget “assumes that the wars in Afghanistan and the Middle East will cause future Congresses to allocate $593 billion in extra war funding that won’t be needed and then claims to save that amount by not spending it.”

It also assumes that the repeal of a section of Dodd-Frank that gives regulators the power to wind down the big banks during a crisis will lead to a savings of $35 billion. The nonpartisan Congressional Budget Office projects savings of just $14.5 billion.

* * *

Finally, with the OPEC Vienna meetingin two days, here are some more details on the biggest surprise in the budget proposal, the sale of half the US SPR oil holdings. As Bloomberg writes, the White House plan to trim the national debt includes selling off half of the nation’s emergency oil stockpile. The sale would raise $500 million in fiscal year 2018 by draining the Strategic Petroleum Reserve, and as much $16.6 billion in oil sales over the next decade.

The Strategic Petroleum Reserve currently holds 687.7 million barrels of oil in salt caverns and tanks at designated locations in Texas and Louisiana. That allows for quick distribution when natural disasters or unplanned accidents occur, according to the Energy Department website.

Measures passed in 2015 and 2016 call for the sale of nearly 190 million barrels of oil from the reserve between 2017 and 2025, to raise money for unrelated government programs. Those sales would cut the reserve by about 27 percent. Slashing the stockpile by half would require further sales, and would risk breaching the legally required inventory threshold. The reserve must contain a minimum of 450 million barrels.

The budget summary document doesn’t indicate the scope or timing of potential oil reserve sales, or whether a $2 billion program to modernize the stockpile’s infrastructure would be affected.

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