The Top Down - Don’t Sweat “One Big Beautiful Bill Act” Deficit Fears

Transcript

Luke Puetz:

Hello, my name is Luke Puetz I'm a research analyst with Fisher Investments, and today we're gonna be talking about why President Trump's one big, beautiful Bill Act is not likely to lead to any sort of fiscal crisis. While President Trump's one big, beautiful Bill Act is politically contentious, we do not believe the specific concern of runaway deficits is merited. Media reports showing huge deficit expansion largely show the effects of extending the 2017 tax cuts that were set to expire at the end of 2025. But extending tax cuts only eases fiscal policy versus the legal baseline. It doesn't alter the current macroeconomic status quo. Analyzing other parts of OBBA shows, it is smaller than other recent major pieces of fiscal legislation and fiscal tightening from Trump's tariff policy. Further offsets near term OBBA fiscal leasing the  Congressional Budget Office estimated OBBA would expand the primary US budget deficit by 2.4 trillion over 10 years, but the macroeconomic effects should be far smaller. Arcane US legislation rules are the source of confusion. Congress passes most major pieces  of partisan legislation using a process called budget reconciliation, which bypasses the Senate filibuster, but requires legislation not to increase the deficit beyond 10 years. That's why many tax cuts from the 2017 Tax Cut and Jobs Act were set to expire at the end of 2025. One of the main goals of OBBA was to prevent those tax cuts from expiring, changing nothing in macroeconomic terms, but costing a lot from when the CBO scores it versus the legal baseline. Figure one shows OBBA deficit expansion looks as big as other recent major pieces of legislation. But when eliminating tax cut extensions, so we only observe changes relative to current policy, OBBA actually decreases the primary deficit over 10 years.

But OBBA isn't an austerity package either. Figure two shows Congress's gaming the 10 year budgeting

window by frontloading stimulus and backloading austerity. Knowing future congresses are unlikely to accept that planned austerity. This strategy allows Congress to pass some new business and personal tax cuts along with new spending priorities. Now, over the next several years, while widely feared Medicaid cuts which are large, will mostly begin after the midterm election, at which point the next Congress will likely need to decide under significant pressure if it want to delay those cuts. So rather than looking at 10 year numbers which are subject to congressional gaming, figure three shows a narrower window to illustrate fiscal effects over the next two years relative to current settings.

OBBA is far smaller than COVID era stimulus packages and even slightly smaller than the 2017 tax cuts, which were a mild economic tailwind in 2018 and 2019, but didn't cause inflation. While fiscal priorities of OBBA are subject to debate based upon personal preferences, we believe widespread fears about OBBA fiscal recklessness are misplaced. Not only are OBA's near term stimulus effects smaller than

TCGA offsetting effects from new global tariffs are likely larger today compared to the 20 18 19 trade war that mostly focused on China. While US courts may still find some Trump tariffs unconstitutional, figure four shows our estimate of how looming global tariffs might offset OBBA in comparison with

how the 20 18 19 tariffs offset the 2017 tax cuts. Overall, the net fiscal expansion this time would likely be smaller. OBBA is a contentious piece of legislation, but we don't believe investors should worry about a two loose fiscal policy. The huge headline numbers mostly reflect an extension of the 2017 tax cuts, which simply maintains existing US fiscal policy by preventing pre-program tax hikes from taking effect compared to 2025 tax rates OBB is smaller than other major fiscal packages and the tightening effects from tariffs further offset OBA's near term fiscal easing. Thank you for viewing today's video. I hope you enjoyed it. If you have any additional questions, please contact your relationship manager. Thank you.