Cozen Currents: The GOP’s Elusive Spending Cuts

“Despite all the discussion of spending cuts under the new unified GOP control in Washington, two words that President Trump did not utter even once during his inaugural address: deficit reduction.”   — Howard Schweitzer, CEO, Cozen O’Connor Public Strategies

The Cozen Lens

• In the face of competing pressures to cut spending and extend trillions in expiring tax cuts, GOP lawmakers are struggling to agree on how to finance their domestic policy agenda.
• While President Trump’s return to the White House means tariffs will again dominate the US-China relationship, they will not be the only tool the new administration uses.
• Big changes are coming to electric vehicles. Most of them can’t be accomplished by a day one executive order though.

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The Size of the Deficit is in the Eye of the Beholder

The Promise of Deficit Reduction. As bond markets waiver on deficit concerns, investors are questioning President Trump’s and GOP lawmakers’ commitment to reducing federal spending.

• Days after his election victory, Trump announced the creation of the Department of Government Efficiency (DOGE), suggesting it would “drive out the massive waste and fraud that exists throughout our annual $6.5 Trillion Dollars of Government Spending.” Treasury Secretary Scott Bessent similarly pledged to adhere to a “3-3-3” economic policy strategy, a core tenet of which would include dropping the federal deficit from 6.4 percent of GDP to three percent by 2029. Trump and Bessent’s rhetoric matches that of fiscal hawks in Congress who have argued that unified GOP control of Washington creates an opportunity to make spending cuts a reality.
• While DOGE and Bessent’s “3-3-3” strategy are unique to Trump’s second administration, promises of steep spending cuts are not. In 2017, Trump entered office with unified GOP control of Washington and plans to remake federal spending, beginning with the FY17 appropriations process. The effort resulted in a delayed, but no less costly, spending package that year and the deficit would go on to grow year-over-year following the enactment of the Tax Cuts and Jobs Act (TCJA) and later COVID relief packages.
• The economic circumstances surrounding Trump’s second term are much different than his first – interest rates, inflation, and the deficit are all higher – leading fiscal hawks to approach the issue with greater sincerity. Yet getting lawmakers to agree to spending cuts, many of which would come from popular mandatory programs like Medicaid and Medicare, is difficult, and there are early signs that the effort is running into significant roadblocks. Similar to 2017, GOP leadership is entertaining a possible bipartisan deal with Democrats to address FY25 appropriations, disaster relief, and raising the debt limit, something that is not expected to include serious cuts to spending.

The Cost of the GOP’s Domestic Policy Agenda. The chief impediment to the GOP’s cost cutting agenda is its plan to extend the expiring tax provisions of the TCJA through budget reconciliation.

• A straight extension of the expiring TCJA provisions is estimated by the Congressional Budget Office to cost $4.6 trillion over a decade. Adding in Trump’s campaign trail tax proposals, border security funding, and defense funding could push that number above $7.75 trillion according to the Committee for a Responsible Federal Budget.
• House and Senate conservatives argue that the reconciliation bill should be offset by up to $2.5 trillion in cuts to mandatory spending coupled with a roll back of Biden-era programs from the Inflation Reduction Act (IRA). But according to a recently proposed “menu” of trillions in potential offsets compiled by the House Budget Committee, most of the savings would come from changes to Medicaid, SNAP, and other social services programs, something moderate GOP lawmakers are already balking Even plans to rescind parts of the IRA that are unpopular within the GOP have received pushback from certain corners of the party.

Smoke and Mirrors. The lack of agreement on how to pay for the reconciliation bill is leading GOP lawmakers to embrace the possibility of not counting the cost of extending the existing tax breaks.

• Late last year, Senate Finance Committee Chair Mike Crapo (R-SD) proposed scoring the reconciliation bill along what is known as a “current policy baseline,” which relies on an assumption that tax cuts are always extended, so the cost of doing so should be excluded. The idea has picked up steam in recent months, with some House and Senate conservatives embracing it and even Treasury Secretary Bessent giving it a sympathetic hearing.
• Although adopting the current policy baseline approach to extend the expiring TCJA provisions in the reconciliation bill would largely resolve the GOP’s deficit math problems, it wouldn’t change the actual budgetary impact of the bill. The Brookings Institution estimates that an extension of the expiring tax provisions without paying for them could increase the deficit to $3.4 to $3.6 trillion by 2034, almost doubling it from an already hefty $1.8 trillion last year.

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He and Xi Are at It Again

Trade War. Aspects of President Trump’s China strategy will be similar to his approach during his first four years, most prominently the emphasis on tariffs.

• Tariffs have not been absent for the last four years but were not prioritized by the Biden administration to the extent that Trump is expected to. Trump believes that tariffs are economically beneficial for the US and that they are an issue that he will be personally engaged with concerning China, increasing the attention they will receive. The debate around the tariffs is different from Trump’s first term, with the question among his advisors not about their merits but rather what their contours should be.
• Not all of Trump’s tariffs are equal. Some are intended as sources of leverage to achieve other policy victories, while others are the policy end goal themselves. For example, Trump’s threat of 10% tariffs for China’s role in the fentanyl trade likely fits better in this first category, while Trump’s threats of tariffs as high as 60 or 70% are more apt in the second. Critically, it does not appear that Trump’s overriding objective is to address the bilateral trade deficit through a trade deal as it was during his first term; instead, he is driving to create greater separation between the world’s two largest economies.
• While Trump did not impose any tariffs on China on his first day in office, the 10% threat as soon as February 1 is lurking. With it likely being a leverage ploy, there is reason to be skeptical it will take effect or last long if it does. The tariffs that are Trump’s policy end goals are likely still some months away, allowing Trump’s nominees to be confirmed by the Senate and to complete the reviews due April 1 that he ordered on his first day in office. These reviews will provide the groundwork for any meaningful future action.

Tech War. What is expected to be different about Trump’s China strategy this term is the greater attention the tech war and its associated tools, such as export controls and outbound investment restrictions, will receive.

• While Trump started the tech war during his first term, the issue accelerated under the Biden administration, with a particular focus on thwarting Chinese development of semiconductors and AI. The Trump administration has yet to signal what sectors or technologies it may prioritize; some clarity could come during the confirmation process for Trump’s nominees, especially whoever he selects to lead the Commerce Department’s Bureau of Industry and Security, which oversees US export controls.
• The Biden administration ramped up export controls aimed at China just as it went out the door. One notable inclusion is the new proposed restrictions on AI chip sales abroad. Given its likely continuation of the tech war against China, the Trump administration will likely maintain these rules in some form. Still, given the criticism of the proposal from industry members and allied countries, tweaks around the margins are possible.
• Trump’s friendly approach to TikTok is likely the exception rather than the rule for how the Trump administration will pursue this tech war. Although Trump was the one to raise concern about the app originally, he has done a complete about-face. He is now interested in reaching a deal that allows TikTok to remain without disruption for users in the US. Other Chinese tech companies are less likely to be as fortunate though and more likely to face treatment similar to Huawei rather than the warm reception TikTok has received

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Rhetoric Versus Reality in Trump’s War on EVs

What Just Happened. Despite boastful claims, government support for electric vehicles (EVs) is still flowing.

• There’s a lot of confusion flying around regarding the recent flurry of executive orders — understandable, and an intended consequence of the new administration’s strategy of flooding the zone. President Trump entered office with a suite of orders targeting EVs specifically. As Trump tells it, he’s already acted to “eliminate the electric vehicle mandate.” The truth is a lot less comprehensive.
• Most of what’s been immediately accomplished is symbolic. One executive order revokes a non-binding target that half of new passenger vehicles sold were electric by 2030. Some order the executive branch to begin doing what we all expected the Trump administration would do anyway — the first steps in a chain that will lead to real changes down the line but with no effective impact today.
• One executive order that threatened to pause disbursement of all funds under the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act had to be walked back and clarified the next day, amid uncertainty and confusion about what it meant for infrastructure spending. The most notable government policy supporting EVs (and thus the biggest GOP target) are the tax credits in the IRA. These credits still flow, as unilaterally halting them is beyond Trump’s ability.

The Best is Yet to Come. Though Trump is limited in what he can tangibly do about EVs today, their growth is sure to be kneecapped over the course of the administration.

• If the IRA tax credits are the carrots, then the sticks providing the actual forcing action of goading the EV transition along was the Biden administration’s tailpipe emission and fuel economy rules. Both are certain to be repealed but require going through the administrative process, which takes several months.
• There’s actually a counterintuitive reason for Trump not to clamp down on the EV tax credits (at least for the time being). The number one GOP priority is tax cuts. The struggle surrounding which offsets in savings can be found to pay for these cuts and how much they can get for them is the hinge-point for all of Washington this year. It’s well accepted that the EV tax credits are among the most likely provisions the GOP will repeal from the IRA. Prematurely limiting the scope and thus possible spend of these credits before the tax cut bill is passed will lead to lower estimates as to how much the repeal will save and thus how big the tax cuts can be.

Other blows against EVs include the coming fight to revoke California’s waivers to set stricter emission standards than the rest of the country, setting up a legal battle. On the other hand, Trump will certainly keep the Biden administration’s over 100 percent tariff on Chinese EV imports, with only possibility for further upside. He’s also promised to renegotiate parts of the US-Mexico-Canada Agreement, which could see domestic sourcing requirements for auto parts increase. At the same time, threatened broader tariffs on Mexico and Canada, or a universal baseline tariff on all countries, could have a massively disruptive impact on US carmakers, whether their vehicles are electric or not.

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