Can Musk achieve the feat of "deficit reduction"?

Written by: Zhou Hao, Chief Economist of Guotai Junan International; Sun Yingchao, Analyst of Guotai Junan International

How much fiscal burden will tax cuts bring? Just to maintain the current situation, Trump may need to solve the new fiscal deficit of up to hundreds of billions of dollars each year, and there is not enough room for tax cuts.

Whether to "cut taxes" or "reduce deficits" first has become the core issue of the Trump administration. 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 fiscal year 2025, the U.S. federal government's budget deficit has reached 83.8 billion U.S. dollars, the largest in the first four months of the past years, even higher than the peak of fiscal spending after the outbreak of the new crown epidemic; on the other hand, the latest U.S. inflation data has once again hit the market's expectations of interest rate cuts. With the scale of the U.S. federal policy debt exceeding 36 trillion U.S. dollars and the unoptimistic interest rate expectations, Trump does not have enough room to implement tax cuts.
How much fiscal burden will tax cuts bring? Trump's tax cut policy is mainly divided into two parts: on the basis of continuing the 2017 tax reform bill, further reducing the corporate tax rate; in addition, considering reducing the tip tax rate for service industry employees. According to the calculation of the US Tax Foundation, the tax policy proposed by Trump will reduce taxes by more than 6 trillion US dollars in the 10 years starting from 2025; this coincides with the calculation results of the Federal Budget Responsibility Committee of the US Congress, which predicts that the tax cuts will increase the US fiscal deficit by about 7.75 trillion US dollars in the next 10 years. This means that just to maintain the current fiscal situation, Trump may need to solve the new fiscal gap of up to hundreds of billions of dollars each year.

Musk: $2 trillion ambition

The stretched fiscal situation prompted the birth of DOGE (Department of Government Efficiency). Trump made drastic reforms on both the fiscal revenue and expenditure sides in his second term. The fiscal revenue of the United States is mainly composed of personal income tax, payroll tax, corporate income tax and other miscellaneous taxes, accounting for 50%, 30%, 10% and 10% respectively. On the revenue side, the tariff revenue that changes from day to 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. The fiscal expenditure of the United States is mainly composed of mandatory expenditure, autonomous expenditure and net interest expenditure, accounting for 60%, 27% and 13% respectively. Considering the actual situation on the expenditure side, there is not much room for maneuver in mandatory expenditure, net interest expenditure and defense expenditure in autonomous expenditure, which also means that only the non-defense part of autonomous expenditure involving the legislative process of Congress each year has room for optimization. However, under the traditional administrative system, it is not easy to reduce such expenditure. This eventually gave birth to DOGE led by Elon Musk.
Musk said during Trump's campaign that he would cut the government budget by $2 trillion. After Trump took office, he immediately published "Elon Musk and Vivek Ramaswamy: The DOGE Plan to Reform Government". This government reform plan describes in detail how he will achieve budget cuts through the newly established Department of Government Efficiency. First of all, the core logic of DOGE is that it will simultaneously reduce regulatory strategies and regulatory personnel. The number of federal employees to be cut should be at least proportional to the number of federal regulations abolished, which means that not only will fewer employees be needed to enforce fewer regulations, but once the scope of their authority is properly limited, agencies will enact fewer regulations. Secondly, as for the source of the $2 trillion cut, the plan mentions that it will help end federal overspending by targeting the $516 billion in federal spending used in ways that Congress did not approve; in addition, there are serious problems with the federal government's procurement process, and the Pentagon's annual spending of more than $800 billion also has considerable room for cuts.
Of course, if we consider that spending cuts can only target non-defense parts of autonomous spending, then the $516 billion of expired authorization projects mentioned in the government reform plan cannot be completely terminated. Even so, after excluding projects such as veterans' benefits, the plan may still release about $300 billion in fiscal spending space. In the end, considering the difficulty of actual operation, Musk said that $2 trillion is the "best result", which violates his earlier goal as co-director of the Government Efficiency Department, but the scale of $1 trillion cut is not impossible to achieve, which is still equivalent to 15% of the government budget.
In less than a month since 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 will distribute more than $72 billion in funds worldwide in fiscal year 2023 alone; the implementation of the US government's layoffs "buyout" plan, as of February 7, 65,000 people have resigned, which will save the federal government $4.2 billion per year based on the average annual salary of about $106,000 for US civilian employees. In addition, DOGE's other projects are also advancing rapidly. It has obtained access to the Ministry of Finance's payment system and has taken down more than 350 government websites.
Looking forward, according to DOGE's time plan, the department will be closed on July 4, 2026, using a relatively conservative $1 trillion federal government spending cut and a 30% mission target to be completed in 2025. This will directly reduce the burden of the US fiscal deficit rate by about 1 percentage point.
How much room does the Ministry of Finance have for operation?
For the Ministry of Finance, "saving money" will be of great help to overall spending, which also means that the overall bond issuance scale may be lower than expected. At the same time, considering the recent rapid rise in long-term yields, the Ministry of Finance has also begun to use some technical means to ease the pressure on the bond market.
As the main financing means for the federal government to make up for the gap between revenue and expenditure, the issuance of U.S. Treasury bonds is mainly responsible for the issuance of the U.S. Treasury. At the end of the first month of each quarter, the Treasury will announce to the market the details of the financing plan for the next few quarters, such as the issuance scale and maturity structure of U.S. Treasury bonds. At the end of January, in the first bond issuance document after the new Treasury Secretary Bessant took office, the Treasury Department expected to maintain most of its bond issuance plans unchanged in the next few quarters, that is, the issuance scale and maturity structure in the next few quarters will remain the same as before. Previously, the market speculated that Bessant would consider increasing the possibility of issuing long-term bonds to finance the deficit, but the results were quite different.
There is a detail worth noting in the latest bond issuance plan. The Treasury Department expects to start a certain scale of repurchase (buyback) in the next quarter. Repurchase refers to the small-amount repurchase operation of U.S. bonds of a specific term conducted by the Federal Reserve Bank of New York according to the instructions of the U.S. Treasury Department. Usually only the primary dealers designated by the Federal Reserve Bank of New York can submit small transaction quotes. Considering the actual operation of the Treasury Department, it may be more appropriate to call it substitution or replacement. Since 2014, the U.S. Treasury Department has conducted a limited amount of debt repurchase every year to maintain its normal operation, and has always regarded it as an important part of the debt management tool for use at any time.
The Treasury Department has two main goals for starting repurchases at this time. First, to reduce interest expenses. At present, the yield of U.S. bonds has fallen significantly from its high point. The Treasury Department can repurchase old bonds with higher interest rates and replace them with new bonds with lower interest rates. Secondly, repurchase can provide liquidity. The opening of repurchase can provide market participants with the opportunity to sell back Treasury bonds at the spot rate of return on a regular basis. The existence of potential sales channels will increase the motivation of investors and institutions to participate in the U.S. Treasury market, which will greatly help improve the liquidity of the U.S. Treasury market. From another perspective, the repurchase plan can absorb the difficult-to-circulate part of the U.S. Treasury brokerage inventory, thereby improving the operating efficiency of the economy. The improvement of brokerage operating efficiency will eventually improve the operating efficiency of the U.S. Treasury market, thereby further improving the Treasury Department's ability to raise funds through U.S. Treasury.
Overall, the U.S. fiscal situation is not without severity, but it is not enough to trigger a serious systemic crisis. On the one hand, the main U.S. fiscal officials have expressed their willingness to control the size of the debt with practical actions. For example, the recent policies of President Trump and Treasury Secretary Benson have a certain effect on controlling the size of the debt, which can largely calm the market's concerns; on the other hand, the Federal Reserve, the Treasury Department and other institutions have corresponding debt management tools to deal with most sudden debt problems. In any case, with such a huge debt scale, the US fiscal system is still "dancing on the edge of a knife" if it wants to continue to operate normally. However, considering that fiscal policy is related to the US economy and inflation outlook, the emergence of the new variable of "deficit reduction" has become one of the key events that investors need to pay attention to in the future. To some extent, the impact of "deficit reduction" may exceed "comprehensive tariffs". "Deficit reduction" will also affect the operation of the US labor market (considering that government employees account for about 15% of non-agricultural employment), which will ultimately affect the operation of the economy and inflation. Before Musk's vigorous "deficit reduction", the market had hardly considered the possible "fiscal health" of the United States.