Policy Updates: Trump Budget and Infrastructure Proposals Due Monday

Posted on 02/11/2018 10:59 AM

Congress will nix most Trump spending requests, infrastructure reform facing further delays



Here comes President Trump's fiscal year 2019 budget proposals. And much like his FY 2018 requests, Congress will largely dismiss them, including expected big cuts in agriculture programs, including crop insurance and food stamps. The FY 2018 budget proposal included $29 billion in cuts to crop insurance and reductions in export promotion, international food aid, rural development and food stamp funding.

An Office of Management and Budget (OMB) official said the Trump administration would make its fiscal 2019 budget request on Monday and would send Congress an addendum showing how it would like the spend the additional $300 billion allowed under the caps established by the budget law (HR 1892) enacted last Friday. The caps would allow $143 billion in additional spending in fiscal 2018 and $153 billion in fiscal 2019. Leaders in both chambers agreed to provide $131 billion in nondefense discretionary spending in fiscal 2018 and 2019 above current-law caps, including $20 billion set aside for transportation, water, energy and rural broadband infrastructure. The defense discretionary cap increases $165 billion during the two fiscal years.

OMB comments. “Simultaneous with our release of the budget, we will release an addendum laying out the Administration's roadmap for how to account for the increased spending caps in a responsible manner,” a senior OMB official said. “It will include additional FY19 funding for a limited set of administration priorities as well as proposals to fix certain budget gimmicks used to circumvent the spending caps. Separate from our FY19 budget request and addendum, we will also be providing technical assistance to Congress on how we recommend Congress allocate funding under the increased FY18 caps.”

Congress has final say. While the Trump administration can only make the request, Congress will determine how the money is actually spent.

Economic assumptions in Trump's coming budget proposals will be labeled optimistic. Stan Collender, a former staff member for Democrats on the House and Senate budget committees, said that the White House should hold off on releasing a budget rather than release one with irrelevant deficit projections and, he predicted, overly optimistic economic growth estimates. “Mulvaney (OMB director) will probably come out and say that our budget will achieve balance in 10 years, which will be nonsense,” Collender said, according to the New York Times.

The White House’s budget proposal assumes the economy can grow at a much stronger pace than independent forecasters expect and with lower inflation and government borrowing costs than officials projected last year, according to a preview of the proposal seen by the Wall Street Journal. Strong growth assumptions with relatively low borrowing costs, particularly in the back half of the budget’s 10-year forecast, help to show much smaller deficits as a share of the overall economy.

The budget proposal projects the economy will grow about 3% annually over the coming decade, the WSJ said, although officials now expect a slightly larger near-term boost, with output rising 3.2% next year before declining to 3% in 2021 and 2.8% by 2026, according to projections reviewed by the newspaper.

Perspective. The U.S. economy grew at a 2.5% pace last year, slightly ahead of the 2.3% projection made in President Donald Trump’s budget proposal last year. In December, Federal Reserve officials raised their projection of GDP growth for the current year to 2.5%, and for next year to 2.1%. They still see the economy growing around 1.8% over the long run.

The White House expects that without its policy changes, the economy would grow at a 2.2% rate over the coming decade. The administration sees around half of the increase to 3% growth coming from last year’s $1.5 trillion tax cut, and the rest from a combination of reducing regulations, attracting new private and local spending on infrastructure and policies to boost labor-force participation.

Versus last year, the administration projects lower inflation over the coming decade and lower government borrowing expenses.

The forecast assumes the 10-year Treasury yield will average 2.6% this year and 3.1% next year before rising to 3.7% by early next decade. When the economy grew consistently at a 3% or higher rate in the 1990s and early 2000s, the average 10-year Treasury moved in a range between 4% and 7%.

A deficit on deficit projections. Last year’s Trump budget projected the U.S. would swing from a deficit of $440 billion in 2018 to a surplus of $16 billion in 2027. Last week, the nonpartisan Committee for a Responsible Federal Budget projected a deficit of $2.1 trillion deficit that year if the current fiscal and tax policies are made permanent.

Did the budget agreement stop a big infrastructure reform bill this year? Some say it did. Reason: the budget deal contains $20 billion more for public works over the next two years, besides the usual transportation spending financed by the gas tax. House GOP leaders are not likely to head into an election promising even more spending. President Donald Trump on Monday is expected to unveil more details about his infrastructure reform plan, but uncertainty will likely remain regarding funding for reforms.

The House Appropriations Transportation-HUD Subcommittee expects the panel to control an additional $20 billion more for infrastructure spending that could be appropriated under the budget deal agreed to in Congress last Friday and signed by President Trump. The budget deal said the money would go not only for transportation infrastructure that falls within panel, but also for water, energy and broadband projects that typically would fall under the responsibility of other Appropriations subcommittees. The division of the extra $20 billion for infrastructure spending over the next two fiscal years hasn't been decided. Some predict that appropriations subcommittees would fight for control of the spending. Federal rural broadband support could move through several channels, including USDA and the Federal Communications Commission.

A look back at the House vote on the two-year budget agreement. The House passed the $300 billion bipartisan deal 240-186 in a victory for Speaker Paul Ryan (R-Wis.), who managed to hold together the majority of his conference, even as the right flank in the Freedom Caucus balked. Ryan lost 67 GOP votes, but he held to the Hastert rule of commanding a majority (167) of his majority.

Downward trend for defense spending was halted with the latest budget agreement, but even with the increases it won’t be much above its modern low of 3% of GDP. This will not be a Ronald Reagan defense buildup, observers note, largely because entitlements now take up so much more of the budget and GDP.

More than 60% of the federal budget is mandatory spending that runs on autopilot.

But the New York Times points out that the deal President Trump approved on Friday includes a $165 billion increase in military spending over two years, “more than the Trump administration had even requested. Military spending will jump to $716 billion in 2019, from $634 billion in 2017. In inflation-adjusted terms, that would put the Pentagon’s budget well above the Reagan buildup of the 1980s and nearly as high as in 2010 — the peak of military spending since World War II — when more than 200,000 troops were deployed in Afghanistan and Iraq. Even before this latest increase, the Pentagon’s budget exceeded the combined military spending of the next eight biggest defense spenders globally — a list that includes Russia, China, Saudi Arabia and India.”

Nondefense spending relative to the economy is the lowest it has been since 1961 — 3.1% of gross domestic product, far below the long-term average of 3.8%, according to the Center on Budget and Policy Priorities.

Details for new seed cotton program.

* Reference Price = $0.367/lb

* Seed Cotton Price: Weighted average of lint and cottonseed prices

* Payment Yield Update: Option to update the upland cotton CCP lint yield based
       on 90% of the 2008-12 actual yield not counting years in which cotton
       was not grown

* Establish Base Acreage:

      (1) Convert generic base to seed cotton base (higher of 80% of generic base
      or '09-'12 planted cotton acres (not to exceed generic)

      (2) Reallocate all generic base to seed cotton & other commodity bases
      according to shares of ‘09-'12 planted

           Other seed cotton program details:

* Effective with 2018 crop year, seed cotton — defined as unginned upland cotton that includes both lint and seed — is eligible for the safety net provisions in the commodity title. This makes seed cotton eligible for the Ag Risk Coverage (ARC) and Price Loss Coverage (PLC) programs.

* Reference price for seed cotton set at 36.7 cents per pound.

* Payment yield for seed cotton will be 2.4 times payment yield for upland cotton on the farm. Owner of the farm will have a one-time opportunity to update payment yield for upland cotton on the farm relative to calculating the payment yield for seed cotton.

* Payment acres. No later than 90 days after law is enacted, owner of the farm will have to allocate all generic base acres. Owner is to allocate generic base acres on the farm to seed cotton base acres in a quantity equal to the greater of (1) 80% of the generic base acres on the farm or (2) the average number of seed cotton acres planted or prevented from planted on the farm during the 2009 through 2012 crop years, but that total cannot exceed the total generic base acres on the farm, or (3) or to base acres for covered commodities (including seed cotton).

* Producers will be given a one-time opportunity to decide whether to go into PLC or ARC for seed cotton as a covered commodity. If they do not make that election, they are considered to have elected PLC. Producers enrolled in PLC or ARC for seed cotton are not eligible for the Stacked Income Protection Program (STAX).

— Dairy provisions in new budget agreement. The Margin Protection Program (MPP) changes in the package would shift the calculation of the actual dairy production margin to monthly as opposed to a consecutive two-month period.

USDA is to extend the election period for calendar year 2018 by no less than 90 days after the bill is enacted or some other additional period as determined by USDA as being necessary for dairy operations to make new elections.

That includes those who had already elected to participate in the program before the budget bill became law.

As for premiums for margin protection, they are now as follows:

Coverage Level (Margin per cwt.)

Tier I Premium – Covered production history less than 5 million pounds

Tier II Premium – Covered production history greater than 5 million pounds

$4.00

None

None

$4.50

None

$0.020

$5.00

None

$0.040

$5.50

$0.009

$0.100

$6.00

$0.016

$0.155

$6.50

$0.040

$0.290

$7.00

$0.063

$0.830

$7.50

$0.087

$1.060

$8.00

$0.142

$1.360


— Insurance provisions in budget agreement. The limitation on crop insurance livestock-related expenditures would be removed including on the Livestock Gross Margin program (LGM).

— Livestock aid programs in budget agreement. The law lifts the $125,000-per-producer payment cap under the Livestock Indemnity Program (LIP) and allows payments to producers who “sold livestock for a reduced sale price” due to natural disaster. The payment cap forced USDA to reduce payments to ranchers harmed by the 2017 wildfires in Kansas and other states.

The package includes two provisions based on bills Sen. Jerry Moran (R-Kan.) introduced last year to makes changes to the USDA's LIP. Sen. Moran’s bills allow for partial payments through the LIP program for injured animals and proposed doubling the LIP payment limit — the disaster assistance legislation expands on the proposals by allowing partial payments and eliminating the LIP payment limit. This will be a retroactive change for 2017, meaning farmers and ranchers across the country who lost cattle during natural disasters in 2017 will be aided by the program changes.

— Tree assistance provision in budget agreement. Doubles payment acreage for the Tree Assistance Program from 500 acres to 1,000 acres.

199A fix update: more time in the repair shop needed. Language necessary to correct a tax reform provision that could alter U.S. grain marketing patterns was not reached in time to make it in the two-year budget deal. One of the key players who failed to get proper language the first time, Sen. John Thune (R-S.D.), said the solution is “close”, a hard-to-define word spoken by anyone from Congress or Washington at large.

The key is what Thune said regarding the delay: "We haven't gotten consensus within the stakeholder community on the language, but we have I think probably as good as we're going to get at a solution," Thune said, without giving any details of the potential solution. "What we found was trying to satisfy co-ops and private grain operators was a challenge and trying to get both of them to agree on final language has been a real challenge."

One or two issues reportedly are holding up an agreement.

The effort involves both the House and Senate tax-writing panels and their staff, along with key lawmakers and those representing grain elevator companies and cooperatives. But like the initial tax language glitch, observers hope the lawmakers and their staffs have contacted private tax analysts this time, especially those experts in agriculture-related tax matters, something they apparently did not do in the initial 199A attempt.

The goal is to keep the tax treatment that cooperatives had prior to the end of the Section 199 provision repealed in the tax reform plan, but language that does not impact the grain marketing as the initial Section 199A provision would.

NGFA comments. One of the of the main groups involved in the process has been the National Grain and Feed Association (NGFA). "Considerable progress has been made during the last several weeks of intensive effort toward reaching an equitable solution," NGFA said, noting all parties involved are "cognizant of the adverse and unforeseen disruptions Section 199A already is having in the marketplace and the perverse impacts it is having on companies' business decisions."

Other items of note:

  • President Trump on Monday is holding an infrastructure meeting with state and local officials and having lunch with VP Mike Pence and Education Secretary Betsy DeVos. On Tuesday, Trump will meet with members of Congress to talk trade.

  • Railroad agency's acting chief resigns amid questions. The acting head of the nation's top railroad safety agency has resigned "effective immediately," the Department of Transportation (DOT) said Saturday after Politico raised questions about whether he had been simultaneously working as a public relations consultant for a sheriff's department in Mississippi. Heath Hall became the Federal Railroad Administration's (FRA) acting administrator in June but appeared on at least two occasions in Mississippi media reports as a spokesman for the Madison County sheriff, in a community where Hall has long run a public relations and political consulting firm. The firm continued to receive payments from the county for its services from July to December, despite his pledge in a federal ethics form that it would remain "dormant" while he worked at DOT.

  • OMB general counsel nominee announced. The White House has nominated Jim Carroll, a deputy White House chief of staff and former general counsel for the Office of Management and Budget (OMB), to be the next director of the Office of National Drug Control Policy, a position commonly known as the "drug czar."

  • Justice Department’s third-ranking official, Associate Attorney General Rachel Brand, plans to resign to take a job in the private sector, the New York Times reported. The move sets up a high-profile confirmation fight at a time when Trump criticizes the department for its handling of the Russia investigation.

Markets. The Dow Jones Industrial Average last week tumbled 1,330.06 points, 5.2%, to 24,190.90, its worst since Jan. 2016. The Standard & Poor’s 500 index plunged 5.2% to 2,619.55. The Nasdaq Composite dropped 5.1% to 6,874.49. On Thursday, both the S&P 500 and Dow had dropped more than 10% from their Jan. 26 high, the definition of a correction, though they made back some of those losses in a late-Friday rally. On Friday, the Dow rose 330.44 points, 1.38%. The Nasdaq was up 97.33 points, 1.44%. The S&P 500 moved up 38.55 points, 1.49%, at 2,619.55.

The downturn ended a streak of 404 trading days without a 5% drop in stock prices from the previous high — the longest such streak in market history. The last correction came in February 2016, when stocks dropped 15% when investors worried that Chinese economic growth might be slowing, a fret that turned out to be a false alarm.

Did equity traders, systems overreact to the “inflation” suggestion of the last Employment report relative to wage growth? Some observers think so because the data were likely misleading, caused by cold weather forcing some workers to remain at home. Impact: fewer hours worked lifted the hourly wage calculation. If so, that wage figure could be reversed when the February data is issued March 9.

Looking at the chart of the 10-Year U.S. Treasury Yield Index, yields are testing the top of a five-year trading range. “This should provide some resistance for interest rates, especially when you consider that it's the second sharpest 80-week rally in 20 years,” says Chris Kimble of Kimble Charting Solutions.

 


 

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