Republicans may bemoan the government deficit, and lowering it was certainly one stated goal of Elon Musk’s Department of Government Efficiency. But the deficit is now set to explode, according to J.P. Morgan Asset Management’s Michael Cembalest, who derided the Republicans for their new budget bill that will add trillions of dollars to the deficit in coming years.
Cembalest, JPMAM’s chairman of market and investment strategy, argued that the designation GOP budget hawk “should probably be retired at this point” and be replaced with the designation “GOP chicken hawks.” Last month, Cembalest critiqued the “indiscriminate” cuts by Elon Musk's Department of Government Efficiency team.
In a new “Eye on the Market” note to institutional investors, he said that analysts are estimating that the U.S. budget reconciliation bill passed by the House would add “$2.8 to $3.4 trillion to deficits over the next ten years when including interest on the incremental debt, and when compared to the CBO’s [Congressional Budget Office's] baseline. If certain temporary provisions become permanent, the cost could reach $5 trillion.”
An analysis by JPMAM and Piper Sandler estimates that the House bill will increase the budget deficit by $2.3 trillion over ten years.
They found that the extension of the Trump tax cuts from 2017 would add $3.5 trillion to the deficit, while the increase in the SALT tax break, increases in both the standard deduction and the child tax credit, along with an increase in both the estate tax exemption and the deduction rate for qualified business income, would add $516 billion, while getting rid of the tax on tips and overtime would add $164 billion. Reducing taxes on seniors would cost $72 billion, and spending for Homeland Security and Defense will add another $285 billion. Other tax cuts and breaks total $388 billion.
Spending cuts won’t be enough to fully offset these additions to the deficit. According to the analysis, there are cuts of $349 billion in student loans, $238 billion in food stamps, and a variety of Medicaid cuts that add up to $612 billion. Then there is the elimination of the EV tax credit, which comprises the bulk of the $513 billion that comes from restructuring the energy bill. Other offsets come to about $1 trillion.
The reconciliation bill now goes to the Senate, where Cembalest does not expect “major changes.” It is also front-loaded. More deficit expansion and stimulus would continue until the 2028 mid-term elections, he explained, saying that “the bulk of the spending cuts start to kick in” after that.
He also noted that these estimates don’t account for any additional growth, and they exclude potential tariff revenues.
While the Tax Foundation, a conservative think tank, projects $2 trillion of tariff collections, Cembalist said that’s uncertain “given the probability of foreign and domestic import substitution, the likely impact of lower GDP growth on overall tax collections and the cost of foreign retaliation.” He said that even when tariffs are included, “the federal debt rises anyway.”
According to the Yale Budget Lab, in the best-case scenario that includes tariff revenues and only temporary tax cuts, the federal debt to GDP would rise to almost 120 percent of GDP by 2034. If there is no tariff revenue and the cuts are permanent, federal debt to GDP would be about 130 percent by that time.
Those estimates are a “stark contrast” to what the White House is saying about the bill, Cembalest said, quoting Trump’s press secretary as saying “This bill does not add to the deficit.” White House press secretary Karoline Leavitt added that “according to the Council of Economic Advisers, this bill will save $1.6 trillion, and the president absolutely understands and hears the concerns of fiscal conservatives and of Americans who want to get our fiscal house in order.”
She said it is “the largest savings for any legislation that has ever passed Capitol Hill in our nation’s history.”
In response, Cembalest said that “I don’t have the energy right now to deconstruct Leavitt’s comments so I’m just going to leave it at that. This is after all an administration that keeps insisting that exporters to the U.S. pay for U.S. tariffs despite practically no real-world evidence that this is the case.”
Even before the election, Cembalest said it was “clear” that Trump’s policies would expand the deficit more than those of his rival. At that time the strategist estimated a deficit expansion of $3 trillion to $4 trillion over ten years, while the policies of Democratic presidential candidate Kamala Harris would only increase it by $1.5 trillion.
