Quick Take: DOGE Will Not Solve the US Fiscal Conundrum

Summary

• For all of DOGE fanfare, the Treasury daily cash balance does not show a decline in expenditures.
• This is because DOGE is an auditing rather than a budgeting outlet.
• Congress does budgeting and the current budget resolution shows fiscal consolidation is to come mainly from the faster growth engineered by the administration’s economic policies, especially tax cuts.
• Historically, scant evidence exists of self-funding tax cuts, suggesting limited fiscal consolidation this year.

Market Implications

• I expect the Fed to remain on hold in 2025, against markets pricing about 1.4 cuts.

DOGE Is an Auditing Rather Than a Budgeting Outfit

Dire warnings DOGE is implementing drastic cuts to federal spending have been front page news since inauguration. Yet, the Treasury’s daily cashflow statement shows government spending has continued increasing apace (Chart 1).

This could reflect that DOGE has been operating for less than a month. While the White House has announced layoffs and buyouts of federal employees, those will not impact federal cashflows until employees notice/buyout periods have expired. Furthermore, personnel-related spending accounts for only about $211bn or 3% of the government’s $6.7tn spending.

Moreover, DOGE is an auditing rather than a budgeting agency. It describes its mandate as ‘safely saving taxpayer dollars and eliminating waste, fraud and abuse.’ For instance, the DOGE website sets out the goal of better linking individual payments to budget line items. And one of DOGE’s key undertakings is to modernize the federal government antediluvian – and creaking – IT. The official acronym for DOGE (USDS) reflects its takeover of the US Department of Software established under the Obama administration to address the dysfunction of Obamacare websites.

DOGE has announced cuts to government spending with great fanfare. But those have been at the behest of the White House, which is trimming government spending but cannot implement major changes. Per Article I of the US Constitution, the power of the purse resides with Congress. And unlike DOGE staffers, Congress has elections every other year and is struggling to fund President Donald Trump’s tax cuts.

Growth-Based Fiscal Consolidation

Congress wants a budget by mid-CY2025 that will implement Trump’s tax cuts (i.e., extending the TJCA tax cuts and additional cuts, including on overtime hours, social security and tips. The first step in the process is adopting a budget resolution, which outlines the budget’s broad parameters.

The budget resolution just cleared in the House Budget Committee shows limited budget consolidation (Table 1). Relative to the Congressional Budget Office (CBO) baseline, which assumes the TJCA tax cuts expire at end-CY2025, the budget resolution shows over FY2025-34:

• Outlays lower by $2.8tn.
• Revenues lower by $7.4tn.
• $2.6tn macroeconomic impact on the deficit. This estimates the impact of the administration’s policies on GDP growth and therefore on revenues and expenditures (also known as ‘dynamic scoring’). The assumption is that the administration’s policies, especially tax cuts, will lift growth and therefore raise revenues and lower expenditures. However, historically scant evidence exists of self-funding tax cuts.

Therefore, without the macroeconomic impact the deficit would be higher by $1.6tn relative to the CBO baseline. With the ‘macroeconomic impact’ the deficit is $1tn lower in the budget resolution.

The deficit trajectory under the CBO baseline nominal GDP growth is about 4% and no macroeconomic impact (Chart 2). The budget deficit remains stable around 6% of GDP during FY2025-34 (i.e., no fiscal consolidation).

By contrast, assuming nominal GDP growth accelerates to 5% by FY2034, with the macroeconomic impact the deficit would fall to 4.5% by FY2034.

It is unclear when the budget resolution will clear the House. Republicans only hold 218 seats to the Democrats 215 (two vacant seats) and Republicans hold wide ranging views on the budget. Republicans elected in marginal districts are concerned the expenditure cuts, concentrated on Medicaid and other social programs, could hurt their constituents. By contrast, the House Freedom Caucus fiscal conservatives appear unlikely to accept a larger deficit. House Speaker Mike Johnson has ruled out making a deal with Democrats, which would require a branch-and-root reworking of the budget.

While the Senate is pushing through its own budget resolution, it is unlikely to be conducive to fiscal consolidation either. The Senate has decided to proceed in two steps. First, funding an increase in military and border security funding, and then funding the Trump tax cuts that expire at end CY2025. The Senate is effectively ‘kicking the can down the road’ and leaving the hard task of funding the Trump tax cuts to the next fiscal year.

Market Consequences

This analysis suggests limited fiscal consolidation (i.e., fiscal policy that is neutral for growth). Therefore, I still expect no Fed cuts in 2025, against market consensus for 1.4 cuts.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)