Written by: Zhou Hao, chief economist of Guotai Junan International; Sun Yingchao, analyst of Guotai Junan International

How much financial burden will tax cuts bring? By just maintaining the current situation, Trump may need to solve the new fiscal gap of up to hundreds of billions of dollars a year, and there is not enough room for tax cuts.

"Tax cuts" or "deficiency cuts" first have become Trump's core issue. According to the latest data released by the U.S. Treasury Department, from October 2024 to January 2025, that is, the first four months of the fiscal year 2025, the U.S. federal budget deficit has reached US$83.8 billion, the largest in the first four months of history, even higher than the peak period of fiscal spending after the outbreak of the new crown epidemic; on the other hand, the latest U.S. inflation data once again hit the market's expectation of interest rate cuts. With more than $36 trillion in federal debt and less optimistic interest rate expectations, Trump has little room for tax cuts. How much financial burden will tax cuts bring? Trump's tax cuts are mainly divided into two parts: on the basis of continuing the 2017 tax reform bill, further reduce the tax rate on corporate side; in addition, consider reducing the tip tax rate for service industry practitioners. According to the calculations of the US Tax Foundation, the taxes proposed by Trump will have a cumulative tax cut of more than $6 trillion in the 10 years from 2025; this coincides with the calculation results of the US Federal Budget Responsibility Committee, which expects that the tax cuts will increase the US fiscal deficit by about $7.75 trillion in the next 10 years. This means that just to maintain the current fiscal situation, Trump may need to resolve the new fiscal gap of up to hundreds of billions of dollars a year.

Musk: $2 trillion ambition

The stretched fiscal situation has driven the emergence of DOGE (Department of Government Efficiency). Trump made drastic reforms in both fiscal revenue and expenditure in his second term. U.S. fiscal revenue is mainly composed of personal income tax, salary tax, corporate income tax and other sporadic tax types, accounting for 50%, 30%, 10%, and 10% respectively. On the income side, the tariff revenue of "changing every day" only accounts for about 2% of the total revenue, which also means that tariffs alone cannot fill the huge fiscal gap caused by tax cuts. U.S. fiscal expenditure is mainly composed of mandatory expenditure, autonomous expenditure and net interest expenditure, accounting for 60%, 27%, and 13%, respectively. Taking into account the actual situation on the expenditure side, there is not much room for defense expenditure in mandatory expenditure, net interest expenditure and autonomous expenditure, which also meansThere is room for optimization for the non-defense part of autonomous expenditures that involves Congress’ legislative procedures every year. However, under the traditional executive system, it is never easy to reduce such expenditures. This eventually gave birth to DOGE led by Elon Musk. Musk said during Trump's campaign that he would cut his budget by $2 trillion, and after Trump came to power, he immediately published "Elon Musk and Vivek Ramaswamy: The DOGE Plan to Reform Government", a reform plan that details how he will achieve budget cuts through the newly established Ministry of Efficiency. First, DOGE's core logic is that it will simultaneously reduce regulatory strategies and supervisors, and the number of federal employees to be laid off should be at least proportional to the number of federal regulations repealed, which means that not only are fewer employees required to enforce fewer regulations, but the agency will enact fewer regulations once its scope of authority is properly limited. Second, for the $2 trillion cut source, the plan mentioned that federal overspending will be ended by targeting $516 billion a year used by Congress without approval; in addition, there are serious problems with the federal procurement process, and there is also considerable room for more than $800 billion in annual spending at the Pentagon. Of course, if the $516 billion authorized expired projects mentioned in the reform plan cannot be completely terminated if considering that spending cuts can only target the non-defense portion of autonomous spending, the program may still release about $300 billion in fiscal spending space after excluding projects such as veterans grants. Ultimately, considering the difficulty of actual operation, Musk said $2 trillion is the "best result", which violated his earlier goal when he was co-head of the Ministry of Efficiency. However, the $1 trillion reduction is not impossible, which is still equivalent to 15% of the budget. In less than a month after Musk took charge of DOGE, he has made remarkable progress, including but not limited to the successful closure of the United States Agency for International Development, which distributed more than $72 billion to the world in fiscal year 2023 alone; implemented the "buyout" plan for layoffs in the United States, and as of February 7, 65,000 people have resigned. Based on the average salary of US civilians of about $106,000 per year, this will save the federal government $4.2 billion annually. In addition, DOGE's other projects are also being promoted rapidly, and it has now obtained the authority to enter the Ministry of Finance's payment system and has been offline for more than 350 websites. Looking forward, according to DOGE's time plan, the department will complete its closure on July 4, 2026, adopting a relatively conservative $1 trillion federal spending reduction scale, and completing the 30% mission target in 2025 for calculation, which will directly reduce the burden of the US fiscal deficit ratio by about 1 percentage point. How much operational space is there for the Ministry of Finance? For the Ministry of Finance, "salary reduction" will be of great help to overall expenditure, which also means that the overall bond issuance scale may be lower than expectedAt the same time, considering the rapid rise in long-term yields recently, the Ministry of Finance has also begun to use some technical means to alleviate the pressure on the bond market. As the main financing means for the federal government to make up for the revenue and expenditure gap, the issuance of US Treasury is mainly handled by the US Treasury Department. The Treasury Department will announce the details of financing plans for the next few quarters to the market at the end of each quarter at the end of the first month of each quarter, such as the scale and maturity composition of US Treasury bonds. At the end of January, and in the first bond issuance document after the new Treasury Secretary Becent took office, the Ministry of Finance expects to maintain most of its bond issuance plans in the next few quarters, that is, the issuance scale and maturity composition of the next few quarters will remain at the previous scale. The market previously speculated that Becent would consider increasing the possibility of issuing long-term bonds to finance deficits, but the results are very different. There is a detail worth noting in the latest bond issuance plan. The Ministry of Finance expects to start buying backs of a certain scale in the next quarter. Repurchase refers to the small repurchase operation conducted by the Federal Reserve Bank of New York on a specific period of US Treasury instructions, and usually only the primary dealer designated by the Federal Reserve Bank of New York can submit small transaction quotes. Considering the actual operation of the Ministry of Finance, it may be more appropriate to call it a replacement or replacement. Since 2014, the U.S. Treasury Department has conducted limited debt repurchases every year to maintain its normal operation and always uses it as an important part of a debt management tool for ready use. The Ministry of Finance has two main goals for starting repurchase at this time, first of all, to reduce interest expenses. At present, the yield on US Treasury has declined significantly at a high point. The Ministry of Finance can repurchase old bonds with higher interest rates and replace them with new bonds with lower interest rates. Secondly, repurchase can provide liquidity, and the opening of repurchase can regularly provide market participants with the opportunity to sell back Treasury bonds at spot yields. The existence of potential sales channels will increase the motivation for investors and institutions to participate in the US bond market, which will greatly help improve liquidity in the US bond market. From another perspective, a repurchase plan can absorb the difficult part of the U.S. Treasury brokerage inventory, thereby improving the operating efficiency of the economy. The improvement of brokerage operation efficiency will ultimately improve the operational efficiency of the US bond market, thereby further improving the Ministry of Finance’s ability to raise funds through US bonds. Overall, the fiscal situation in the United States is not uncommon, but it is not enough to trigger a serious systemic crisis at present. On the one hand, the main responsible personnel of the US finance have expressed their willingness to control the scale of debt with practical actions. For example, President Trump and Treasury Secretary Becent recently have some effect on controlling the scale of debt, which can greatly appease the market's concerns; on the other hand, the Federal Reserve, the Treasury and other institutions have corresponding debt management tools that can deal with most sudden debt problems. In any case, under such a huge debt scale, the US fiscal policy is still "dance on the tip of the knife", but considering that fiscal policy is related to the outlook for the US economy and inflation, the emergence of the new variable "reducing deficit" has become one of the key events that investors need to pay attention to in the future. To some extent, the impact of "debt reduction" may exceed "comprehensive tariffs", "reducing deficits" will also affect the operation of the US labor market (considering that employees account for about 15% of non-agricultural employment), thus ultimately affecting the operational effect of the economy and inflation. Before Musk's vigorous "reducing deficit", the market had almost never considered the possible "fiscal health" of the United States.