The U.S. House of Representatives, where Republicans hold a majority, recently passed a massive tax and spending bill by a narrow margin. The bill still needs to be sent to the Senate for deliberation and eventually signed by the president. At present, it seems that there are still many controversial points in this bill.
According to the bill, in terms of tax cuts, the Tax Cuts and Jobs Act, which will expire at the end of this year, will be extended. This bill was passed in 2017. The tax cuts for companies and individuals in it allow most individual taxpayers to be exempted from tax burdens. In addition, the bill will provide new tax breaks for tips, overtime, car loans, etc.
While cutting taxes, in terms of spending, the bill will raise the threshold for poor groups to receive Medicaid and food assistance, and is expected to cut nearly $800 billion in Medicaid program funds; the bill will also cancel a number of green energy incentive policies promoted by former President Biden. But at the same time, it will increase defense spending and provide more funds to combat illegal immigration.
The bill aims to fulfill Trump’s campaign promises on tax cuts and other aspects, but the spending cuts in it have triggered strong opposition from Democrats and others.
Tax cuts can boost economic growth. According to a Reuters report, Trump and his team have emphasized that the $1.6 trillion in direct spending cuts will stimulate economic growth and create $2.5 trillion in new revenue within 10 years to recover costs.
But budget agencies and economists generally believe that the spending cuts included in the bill are difficult to effectively offset the reduction in fiscal revenue brought about by policies such as tax cuts and the increase in spending such as defense spending, which will also affect economic growth. In order to maintain growth, the bill is expected to significantly increase federal debt.
The U.S. Federal Budget Accountability Committee said in a statement earlier that the bill passed by the House of Representatives will cause the national debt to surge by more than $3 trillion, and may also bring hidden dangers such as the “fiscal cliff” after the relevant policies expire.
Naomi Fink, chief global strategist at Nikko Asset Management Co., Ltd., said that tax cuts may be intended to stimulate demand, but “if the tax cuts are not as fast as the speed of raising government debt financing costs, it will not work.”
Brian Nick, chief investment officer of NewEdge Wealth, a wealth management company, predicted: “If the bill is passed in the Senate, spending cuts will be reduced, stimulus measures will increase, and the deficit will grow more significantly.”
Schumer, the Senate minority leader and Democrat, said on social media that cutting Medicaid and food aid funds will lead to the closure of food relief stations and rural hospitals.
House Republicans’ decision to cut Medicaid funding will bring “huge political risks” because the program is so popular that almost one in five Americans rely on it for health insurance.
Darrell West, a senior fellow at the Brookings Institution, also said that cutting Medicaid will have a serious impact on areas with more Republican supporters. People in these areas rely on Medicaid, and a large number of people are expected to be affected by funding cuts.
Another estimate from the Congressional Budget Office shows that if the bill becomes law, overall, the resources received by the lowest-income 10% of households will decrease, while the resources of the highest-income 10% of households will increase. Observers believe that the bill will make Trump supporters’ wallets thinner, which may have negative political consequences.
In order to reduce spending, the bill will cancel several green energy incentive policies promoted by former President Biden, cancel the funding established by the Inflation Reduction Act, and abolish grants aimed at reducing air pollution, greenhouse gas emissions or purchasing electric heavy-duty vehicles. This has been opposed by some people, who believe that this green energy incentive policy should not be canceled quickly.
The bill has also aroused doubts from market participants. Some investors are disappointed with the current version of the bill, and investors are observing the impact of the bill on financial markets. Analysts say that the last thing the global bond market wants to see is “legislation that may cause a larger budget deficit in the world’s largest economy.”
Amid many controversies, the Trump administration clearly hopes to pass this bill as soon as possible. Otherwise, once the economy sends a clear downward signal, it will increase the risk of spending cuts being more unpopular among senators. It remains to be seen whether the bill will be approved in the end and what impact it will have on the US economy.