CITIC Securities: Musk can't do it, "Trump 2.0" is likely still fiscal expansion

Based on relatively optimistic assumptions, we predict: 1) No cuts to Social Security, Medicare, national defense, veterans' benefits, and interest expenditures; 2) Medicaid spending returns to the level during Trump 1.0 (a reduction of $160 billion); 3) A reduction of $1.72 trillion (the remaining portion after excluding Social Security, Medicare, national defense, Medicaid, veterans' benefits, and interest expenditures) is assumed to follow the 30% reduction proposed in the DOGE Act (a reduction of $516 billion); 4) The DOGE assumption proposes a 5% reduction in federal employees as suggested by the Federal Freeze Act (a reduction of $48 billion). We believe that Musk's $2 trillion reduction "boast" is difficult to achieve, and the likelihood of a greater reduction in fiscal spending than the decrease in tax revenue during the Trump 2.0 period is low, with a high probability of continued fiscal expansion.

It is clear that cuts to Social Security + Medicare are difficult:

The U.S. fiscal year 2024 expenditure is $6.75 trillion, of which Social Security is about $1.46 trillion and Medicare is about $0.87 trillion, totaling $2.33 trillion, accounting for 35.46% of total fiscal expenditure. Given that Trump 1.0 adhered to the commitment of "not cutting Social Security and Medicare," and reiterated this during the current election, along with the lack of urgency and necessity to cut Social Security and medical spending during his 2.0 term, we expect this portion to be difficult to reduce.

Hawkish dominance makes defense spending easy to increase but hard to cut:

The U.S. defense spending for fiscal year 2024 is about $0.87 trillion, accounting for approximately 13% of total fiscal expenditure, about half of discretionary spending. Although defense spending is part of discretionary spending, its budget cuts are not very "free." Considering Trump's "build the strongest military," Bessent's statement that "cutting U.S. defense spending will weaken the dollar's reserve status," Meloses' limited experience with defense spending arrangements, and Musk's difficulty in separating his interests from government contracts, we believe that defense spending is unlikely to be cut during Trump 2.0 and may even increase.

Small cuts may be difficult to achieve the DOGE boast:

1. After deducting Social Security and Medicare totaling $2.33 trillion, defense spending of about $0.87 trillion, and interest expenditures of $0.88 trillion from $6.75 trillion, the remaining $2.66 trillion, although divided into discretionary and mandatory spending, theoretically has the potential for cuts under Republican control of both houses of Congress. However, cuts to veterans' benefits will face significant political resistance and are expected to be impossible to reduce. Medicaid is the "third rail" of American politics (describing highly controversial and untouchable political issues), and we expect Trump to have difficulty making significant cuts, possibly reducing the $160 billion increase in Medicaid spending during the Biden administration.

2. The $1.72 trillion remaining after deducting veterans' benefits and Medicaid spending has relatively strong flexibility. However, even if DOGE were to cut this portion entirely, it would not reach the goal of reducing fiscal spending by $2 trillion. Referring to the 30% reduction proposed in the DOGE Act, we estimate that $516 billion can be realistically cut over four years A drop in the bucket, limited salary cuts for federal government employees:

DOGE, as a consulting agency, only has "advisory power" and does not have the authority to directly dismiss federal government employees or reduce federal government agencies. We expect that DOGE's layoff plan will face difficulties, and during Trump's term, it may achieve the proposed 5% reduction in federal personnel under the "Federal Freeze Act" (corresponding to about $48 billion), which is a drop in the bucket for fiscal spending cuts.

In summary, based on relatively optimistic assumptions, we expect approximately $724 billion in fiscal spending cuts during Trump's 2.0 term:

1. No cuts to Social Security, Medicare, defense, veterans' benefits, and interest expenditures;

2. Medicaid spending returns to the levels during Trump's 1.0 period (a cut of $160 billion);

3. A reduction of $1.72 trillion (the remaining portion after excluding Social Security, Medicare, defense, Medicaid, veterans' benefits, and interest expenditures) is assumed to be cut by 30% as proposed in the "DOGE Act" (a cut of $516 billion);

4. DOGE assumes a 5% reduction in federal employees as proposed in the "Federal Freeze Act" (a cut of $48 billion).

Elon Musk's $2 trillion reduction "grandiose statement" is difficult to achieve, and the likelihood of fiscal spending cuts exceeding the reduction in tax revenue during Trump's 2.0 term is low, with a high probability of continued fiscal expansion (the most optimistic estimate shows a reduction of $821 billion in fiscal revenue over four years).

Author of this article: Li Chong and Cui Rong from CITIC Securities, source: CITIC Securities Research, original title: "Overseas Macro | U.S. Fiscal Spending Cuts: A Small Axe or a Big Axe?"

Analysts

Li Chong S1010522100001

Cui Rong S1010517040001

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