POTUS 45: The stage is set
I sat down with the Head of the UBS US Office of Public Policy, John Savercool, to discuss the postelection climate in Washington.
John, with the Republican-controlled congress now sworn in and Republican President-elect Trump just eight days away from inauguration, it would seem that the stage is set for action in DC after years of gridlock. Just how successful will the new administration and congress be in delivering upon the Trump/GOP agenda?
The stage is set for action on those things that the president-elect and the Republican congress agree on – rollback of Obama-era regulations and executive orders, repeal of Obamacare and advancement of a comprehensive tax reform bill. While there is Republican unity on those issues, there is much less unity on other issues that will be addressed later in the year or by either congress or the president-elect individually, such as immigration, trade, an Obamacare replacement, entitlement program reforms and broader deficit reduction efforts.
Congress will go out of its way to accommodate the new president in the first few months, but friction is likely to develop once the other issues are dealt with and Republicans take on the messy business of governing. How they work through the friction will determine how voters assess their accomplishments and play a role in the next election, which may not be on the public’s mind yet but is certainly on the minds of lawmakers.
Many of the conversations I’ve had with clients of late have focused on the question of tax reform. To what extent can we expect the Trump administration to focus on this in the first 100 days and how far reaching might the reform be?
Comprehensive tax reform is perhaps the biggest priority for the incoming Trump administration. The need for tax reform will be highlighted extensively throughout the first 100 days by Republicans, but details of what will be in the bill will be vague initially. Putting together a major tax reform bill and passing it would be a significant accomplishment this year, but no one should underestimate the difficulty of this exercise. Practically every provision of the 70,000-page tax code has a constituency associated with it, and they will mount considerable lobbying efforts to protect their interests – a process that has already begun. We believe hearings will get started on tax reform and occur throughout the winter and spring. A near-final bill will begin to emerge in the summer, and a final vote could occur in the late summer or fall. Republicans want to address both individual and corporate tax reform by lowering rates and eliminating or tightening up existing deductions and preferences embedded in the tax code. If Republicans stay unified and believe that the political and economic benefits exceed the inevitable concerns that certain groups and economic sectors will have with provisions that adversely affect them, a bill will be passed and signed into law. This process can easily become bogged down, though, and Republicans will have to keep the momentum high for the bill over many months. We think there is a slightly better than a 50-50 chance a bill will be finalized.
It would seem that the regulatory pendulum is poised to swing back into a less restrictive posture. What will regulatory reform look like and when is it likely to take shape?
Regulatory reform is a top priority for both Republicans in congress and President-elect Trump this year. The president-elect will get the process started by rolling back many of the regulations that are working their way through the bureaucracy at this time. Newer regulations, such as those finalized by the outgoing administration last year, are especially vulnerable and will be targeted for delay or repeal. Many of the Obama executive orders, some of which relate to regulatory matters, will also be targeted for repeal. Many of the rules subject to delay will ultimately be repealed once the new cabinet members have time to review them.
Congress also will use its authority under the Congressional Review Act (CRA) to kill certain regulations put into effect by the Obama administration in the last few months. Additionally, congress will look to make reforms to the federal regulatory process. The House has already passed bills requiring congressional votes on future regulations from the executive branch that have a significant impact on certain economic sectors and the economy and to require significant regulations to be sunset over a certain period of time. These reform measures will have a difficult time getting approval in the senate, where 60 votes are needed for passage, but the action by the president will certainly occur and occur quickly after he is inaugurated. Regulatory reform will be an early “win” for Republicans and will benefit a broad range of US economic sectors, particularly the energy sector and service industries.
John, there has been considerable debate over the details for infrastructure and defense spending, one of Trump’s big campaign promises. Do you have some sense of what the major spending priorities might be?
Defense and infrastructure will be two areas that should see a big boost in federal spending in next year’s budget. The president-elect has mentioned a USD 1 trillion infrastructure package, but this would include a significant private sector commitment that would offset its cost to taxpayers.
Frankly, we do not believe a USD 1 trillion infrastructure package will advance this year. Rather, we see something smaller, closer to USD 400 billion, as a more viable option. As the president-elect prioritizes defense and infrastructure, he will be pressured to find other areas of federal spending to decrease to ensure the increasing budget deficit doesn’t spiral out of control.
We see reductions or flat spending requests in other parts of the discretionary budget that will include education, healthcare and housing, among others. This will trigger a major fight in congress as Republicans will rally around increased defense spending and Democrats will rally behind similar increases in the domestic spending that Trump will seek to cut. These conflicts will break out in late April when government funding expires, and the two sides will have to agree on a budget for the rest of the fiscal year, which runs through the end of September. As we have seen over the last few years, a government shutdown could occur if these differences are not reconciled in some way.
The old adage is that politics stop at the water’s edge, and yet given all the campaign and post-campaign rhetoric around foreign relations, security, trade reform, and immigration, it’s hard to imagine that DC won’t fully engage in issues far beyond our borders. What is the most significant shift in our international posture we can expect in the first 100 days?
Throughout the campaign and after his victory, Donald Trump has given us a certain sense of his views on foreign policy and national security. Once he is in office, however, I think it is reasonable to think that he will take a step back and look fresh at our national security challenges after he has been briefed by our intelligence experts and ambassadors, including those whom he has nominated. That doesn’t mean that he will reverse all of his stated views, but I think it does suggest that he will be more deliberate in how he approaches our national security challenges.
I believe the biggest change that we will see as Obama passes the baton to Trump is how he will negotiate with other countries. Negotiating is his passion and where he thinks he excels relative to his predecessors. So, for instance, our position on issues relating to China will be viewed not so much on individual challenges we face with China, but on how the overall relationship with China is advanced. Trump’s hinting that he may change the US policy with respect to recognizing Taiwan is not so much an embrace of that position as it is potential leverage in getting China to change its behavior in other areas, such as its military positioning in the South China Sea or working harder to influence North Korea’s nuclear missile program. Trump’s style will be very different, and he will negotiate in ways that some international partners will find odd. Perhaps it will work, perhaps it won’t. However, I think his style will be what sets him apart rather than the policy changes we will see once he assumes offices.
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