Market Overview

US Budget Deficit Increased By 6% In November, But The Deficit Could Widen Under Trump

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Logical economics dictates that governments must always strike a balance between spending and revenue, but logic doesn’t always prevail when politicians make decisions. The Treasury Department reported that the federal government racked up a budget deficit of $136.65B in November.

Last's month budget deficit is wider that the consensus economists' estimate of $135B. More so, November's budget deficit is two times more than the federal government's budget deficit of $65.55B in November 2015. This piece however explores how the budget deficit could increase at a faster rate under Trump. The piece also examines the possible effects of the budget deficit on the economy going forward.

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Trump's administration could increase government spending

President-elect Donald Trump campaigned passionately to make America great again during the build up to the 2016 elections. His chosen strategy for making America great again includes reviving the economy, reducing the trade deficit, and making sure that the country projects a stronger exporting power.  Trump has also promised to cut taxes for 'everybody' while increasing spending on infrastructure.

The problem however is that Trump's plan for making America great sounds excellent on paper and it makes a good mantra to drive voters to a frenzy. However, the practically of the plans suggests that Trump could unintentionally increase the country's budget deficit to new highs. The increased infrastructure spending, tax deals (such as the deal with Carrier) and tax cuts would further widen the gap between government's expenses and its revenue.

The U.S government has always had a mix of budget surpluses and budget deficits, but successive administrations have maintained a consistent stream of budget deficits since 2002 as seen in the chart below. Hence, it wasn’t surprising that the U.S. budget deficit increased in November as the government's expenses continue to outpace its revenue.

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It might interest you to know that the a widening of the gap between government spending and revenue will put more pressure of the U.S. Federal Reserve to raise interest rates at a much faster rate. In fact, economists have forecasted that the fed will raise interest rates by 0.25 percentage points four times between now and December 2017. The fed is currently holding a two-day policy meeting and Wall Street is watching earnestly to know the fed's stance when Janet Yellen holds a news conference after the meeting.

Trump's plan to make the dollar stronger could backfire

Trump's plan to revive the economy might serve the intended purpose of making the dollar stronger. On the surface level, a strong dollar appears to be a sign that the economy is improving; however, a strong dollar could trigger more tensions in an already strained global trade as different countries start to embrace protectionism.

For instance, president-elect Trump has been very vocal about what he calls an artificially undervalued Chinese Yuan. The USD however has gained about 3% against a basket of currencies since Trump's victory. Hence, Trump's proposal to make the dollar stronger would actually worsen the exchange rates between the greenback and other currencies.

In addition, a strong dollar will make U.S. exports less competitive in the global markets; hence, our trade deficit could soar in relation to our gross domestic product. Sam Ovens, an entrepreneur and small business consultant, notes that a strong dollar is bad news for American businesses because "foreign buyers would shun U.S. products because a stronger dollar increases the costs for them". In contrast, foreign products will become cheaper in the U.S. and American's might make rational decision to buy products made by foreign brands.

More so, U.S. firms with large exposure to foreign markets might record reductions in their bottom line as currency headwinds eat into their margins. You should not be surprised if firms such as Apple Inc.(NASDAQ: AAPL), The Coca-Cola Co (NYSE: KO), and McDonald's Corporation(NYSE: MCD)among others report steep losses in their revenue in fiscal 2017.

Posted-In: marketacrossGlobal Economics Federal Reserve Markets

 

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