Chicken Hawks: a quick note on the US budget reconciliation bill

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Text: J.P.Morgan, Eye on the Market

May 2025, Chicken Hawks: A quick note on the US budget reconciliation bill

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Good morning, everybody. This is Michael Cembalest with the late May 2025 Eye on the Market podcast. This one is called Chicken Hawks. For those of you that, remember, the most famous chicken hawk of all time was a guy named Henry Hawk. He was the tiny little chicken hawk that used to hang out with Foghorn Leghorn in the Looney Tunes and Merrie Melodies cartoons.

He appeared from 1942 to 1961. I was going to show a picture of him that ChatGPT 4.0 was willing to draw for me. But we did not want to violate the copyright. So you'll just have to imagine that in your head.

But I was thinking of chicken hawks, which is a euphemism for people that are hawkish, but not really when I saw the passage of the budget reconciliation bill in the House. And this was supposed to-- this process was supposed to be impacted by all of those alleged GOP fiscal hawks in the House.

I think it's time that we retire that particular description, or at least refer to them as chicken hawks instead. Because the bill that got passed by a single vote in the House, with their acquiescence, is really a big debt and deficit expanding bill, despite what the White House Press Secretary has been saying about it.

So let's dive into it. This is just a brief discussion of the dynamics of the reconciliation bill.

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Text: House Reconciliation Bill Budget reconciliation bill: what passed the House. Scenario outcome: $2.3 trillion expansion of budget deficit over 10 year window vs. CBO baseline Assuming $4 trillion instruction to Ways and Means Committee regarding allowable increase in net deficit. A graph below shows the amount of money added or subtracted from the budget for Spending Cuts, TCJA extension, Tax Hikes, Tax Cuts and Spending hikes. A green bar for Spending cuts goes from $0 to about $1,600 and has sections labeled Energy & Commerce +968, Education (student loans) +349, Agriculture (food stamps) +238, and Other cuts & judiciary revs +179. A red bar labeled TCJA extension minus 3,513 goes from about negative $1,700 to $1,700. A green bar for Tax hikes goes from about negative $1,700 to negative $800 with sections labeled Other tax offsets +463 and Energy bill restruct +513. A red bar for Tax cuts goes from about negative $2,000 to negative $700 and has sections TCJA adj + SALT cap hike minus 516, No tax on tips +QT minus 164, Manufac incentives minus 143, TCJA blurry text minus 99, Reduce tax on sensors minus 72, Other tax cuts minus 240. A red bar for Spending hikes goes from negative $2,250 to negative $2,000 is labeled Homeland Sec and Defense minus 285. Arrows point from the top of the Spending cuts bar to the top of the TCJA extension bar, then the bottom of the TCJA extension bar to the bottom of the Tax hikes bar, then from the top of the Tax hikes bar to the top of the Tax cuts bar, then from the bottom of the Tax cuts bar to the top of the Spending hikes bar. Text below: Source: J.P.M.A.M., Piper Sander. May 24, 2025. [i} includes Medicaid cuts (work requirements $273, provider taxes & state directed payments $184, eligibility & enrollment $155). {ii} mostly EV tax credit termination plus scaled back PTC/ITC/45x credits. {ii} includes modifications to premium tax credit & retaliatory tax on foreign multinationals. {iv] Refers to expanded TCJA individual & estate tax provisions such as increasing the standard deduction, raising the child tax credit, boosting the deduction rate for qualified business income & raising the estate tax exemption. Positives/green = spending cuts & tax hikes: negatives/red = tax cuts & spending hikes. J.P. Morgan

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So, OK, the House passed the bill by a single vote. And my team and I worked on this flow chart because it helped me understand what was going on. A lot of the exhibits and things that we're reading were confusing.

So I decided to make something that made sense to me. Maybe it'll make sense to you. Or maybe it'll also be confusing to you. So you start out with some spending cuts, close to $1 trillion that falls under something called energy and commerce. Most of that are things like Medicaid cuts and specifically work requirements, provider taxes, state-directed payments.

So almost $1 trillion of cuts in the energy and commerce. And then you have around $350 billion of cuts to student loans, $240 billion in cuts to food stamps, and then some other cuts that amount to almost $200 billion. Then you extend all of the TCJA tax cuts from 2017. That costs you something in the neighborhood of $3.5 trillion.

Then you try to raise some money back by doing some tax offsets and a restructuring of the energy bill, which is basically a sharp scaling back of the energy bill, mostly things related to EV credits, and charging, and some of the extensions to the ITC and credits for wind and solar. And in terms of other tax offsets, you're looking at things like modifications to the premium tax credit, a retaliatory tax on foreign multinationals from countries that do bad things to the US, that kind of stuff.

And that gets you back a few hundred billion. But then you're spending that and more by doing an increase in the SALT cap, no taxes on tips and overtime, some manufacturing incentives, reduced taxes on seniors, a few other tax cuts. And then if you throw in a little over $200 billion for Homeland Security and Defense, you get something in the neighborhood or something in the neighborhood of $2.5 trillion, let's say, of an expansion in the budget deficit over the 10 year window versus the CBO baseline.

Now, it's really important to understand what that means, versus the CBO baseline. So yes, this is a big budget expansion. But we shouldn't be under the illusion that there wouldn't have been some kind of budget expansion versus the CBO baseline if Harris had won the election. When we ran the numbers on her policies, she was going to allow the tax rates to sunset, meaning go back to where they were before, on people with more than $400,000 in adjusted gross income.

You probably would have gotten somewhere between $1 trillion to $1.3 trillion of budget deficit expansion versus the CBO baseline. But for starters, the Trump expansion versus the baseline looks to be at least twice as big, maybe three times as big, particularly when you factor in things like interest on the debt.

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Text: Front Loading. Estimated impact of reconciliation bill on CBO baseline deficit, US$ billions. A graph below shows dollar amount for years 2025 to 2034 with a blue line labeled Piper Sandler starting at about negative $90, dipping to about negative $530 in 2027, increasing to almost 0 in 2031, then decreasing again to about negative $150 in 2034. A gold line labeled Committee for Responsible Federal Budget starts outa little above 0 then follows pretty much the same trajectory except only increases to about negative $100 in 2031 then decreases to about negative $200 in 2034. A downward arrow on the graph is labeled Deficit expansion. Text below: Source: Piper Sandler, C.R.F.B, J.P.M.A.M. May 2025. Text to the side: These deficit estimates are "static"; they do not include whatever benefits may accrue from additional growth due to stimulus (dynamic scoring), and they exclude tariff revenues. Tariff impacts on budget projections are complicated; tariff revenue would only be considered in a legislative score if the tariffs were part of the legislation, and in this case, tariffs are not materially included in the bill. Tariff revenue generated through Trump's executive actions will be incorporated into CBO next baseline later this summer, and would be included based on tariffs in effect when they compute the baseline.

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The other thing that's notable about the reconciliation bill that's passed by the House is how front loaded it is. And we have a chart in here that shows two different estimates. One's from the Committee for a Responsible Federal Budget. The other one is from an economics research firm called Piper Sandler. The guy that does all the work there, he's fantastic. His name is Don Schneider. And he actually was the one that worked on the Hill for Paul Ryan on the 2017 TCJA.

So he knows his numbers. And he knows that the reconciliation process cold. And when you look at the forecasts from both of those entities. The impact on the baseline deficit is really front loaded, coincidentally, to mostly be dumped in right before both the midterm elections and the next presidential election. And then it kind of scales back.

So yeah, so you take that for what it's worth. Now, these deficit projections, the impact on the deficit increasing by 2 trillion, 3 trillion, whatever it is, they are static. So what does that mean? They don't include whatever benefits might accrue from additional growth due to the stimulus here. That's called dynamic scoring. And that won't happen.

You won't see the benefits of that until the next time the CBO runs their numbers later this year. And it also doesn't include the impact of tariffs. And tariffs get complicated. When people do budget forecasts, like the CBO, or the OMB, or places like the Committee for a Responsible Federal Budget, they would only include the impact of tariffs if they were legislated in the reconciliation bill itself.

And for the most part, the tariffs would be done by executive orders, and not through the reconciliation bill. So they don't get included. So I would agree with people that say, well, this is kind of overstating the impact on the actual real world deficit versus the baseline, because there's going to be some degree of tariff revenue.

OK, let's take the Tax Foundation, what I think is a very optimistic estimate of $2 trillion of tax revenues over the next 10 years, and I think it's very uncertain there could be retaliation, you could have reduced growth and tax revenue impacts. But let's take that for what it's worth, and then look at these charts from the Yale Budget Lab.

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Text: House Reconciliation Bill. That said, how much might tariff revenues alleviate the debt and deficit situation? Yale's Budget Lab released a series of charts showing four scenarios: tax cuts provisions temporary or permanent, and tariff revenues included or excluded. The Tax Foundation assumes $2 trillion of tariff collections over the next ten years, but such projections have an enormous degree of uncertainty 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. The challenge in this kind of exercise is similar to one we covered in the May 1 piece on DOGE: cutting 20% to 25% of IRS staff would reduce employee headcount, but most estimates project multiples of such savings in lost IRS tax collections (the CBO estimates that for every $1 cut to enforcement the Treasury loses $5 to $9 in revenue from uncollected taxes). In any case, even when tariffs are included, the Federal debt rises anyway. Two graphs below. On the left is a graph titled Federal debt to GDP showing the percent per year. The Permanent without tariff revenue line increases from 100% in 2025 to 130% in 2034. The Temporary without tariff revenue line increases steadily from 100% in 2025 to about 126% in 2034. The Permanent with tariff revenue line increases from 100% in 2025 to about 124% in 2034. The Temporary with tariff revenue line increases from 100% in 2025 to 120% in 2034. Text below: Source Yale Budget Lab, May 2025. On the right is a graph titled Total budget deficit to GDP showing percent from year 2025 to 2034. The Temporary with tariff revenue line starts at about negative 6.3 %, decreases to negative 6.4% in 2029 then increases to about negative 5.9% in 2031 then levels off at about negative 6.3% again in 2034. The Permanent with tariff revenue line decreases from about negative 6.3% in 2028 to about negative 7.1% in 2034. The Temporary without tariff revenue line starts at about negative 6.8%, decreases to about negative 7.2% in 2029, increases to about negative 6.7% in 2031, then decreases to about negative 7.1% in 2034. The Permanent without tariff revenue line decreases from negative 7% in 2028 down to negative 8% in 2034. Text below: Source: Yale Budget Lab, May 2025.

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And they looked at four different scenarios. Are the tax cuts permanent or temporary? And are we including these tariff estimates from the Tax Foundation or not? So obviously, the worst debt scenario and the worst deficit scenario are associated with some of the tax changes being permanent and excluding tax revenue.

And then the most optimistic one would be the one when the tax changes are temporary and you're including the tariff revenue. So let's go to that one first because that's really all we need to talk about here. Even when you assume that the budget tricks that the administration has put into the House bill are temporary, and you include the $2 trillion of tariff revenue, you still have an inexorable rise in the debt from around 100% of GDP to 120% of GDP over the next 10 year budget window. And you have a budget deficit to GDP that really never gets better than 6%, which is a pretty scary number as budget deficits go.

Just as one indication, the Maastricht criteria, which Europe sometimes does or doesn't adhere to is half of that. So bottom line, even when including the benefit of tariffs, and even when assuming that some of these tax cuts are temporary and will sunset in the future, you're still looking at a bill that is very expansionary as it relates to both the debt and the deficit.

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Text: House Reconciliation Bill. The charts on the prior page are in stark contrast to White House comments about the impact of the bill: "This bill does not add to the deficit In fact 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," While House press secretary Karoline Leavitt stated "That's what the intention of this bill is. There's $1.6 trillion worth of savings in this bill" she continued. "That's the largest savings for any legislation that has ever passed Capital Hill in our nation's history." 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 US pay for US tariffs despite practically zero evidence in practice that this is the case (as illustrated in the Trump Tracker charts on import prices).

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Now, the White House disagrees. There was a comment from the Press Secretary, the bill doesn't add to the deficit. It will save $1.6 trillion. The House understands the concerns of the fiscal conservatives, a.k.a. the chicken hawks, who want us to get our fiscal house in order. There's $1.6 worth of savings in the bill.

I don't have the energy right now to deconstruct this. I can't find the background work to substantiate this. So I'm just going to leave it for what it is. This is, after all, an administration that keeps insisting that exporters to the US are the ones paying for US tariffs, even though there's almost no evidence in practice that that's the case.

And you can look in our Trump Tracker to see what's been happening to import prices this year. They're not going down. Some of them are going up. Which means that we can see that a combination of US importers and US consumers are paying for those tariffs.

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Text: Bond yields. A graph titled Government bond yields shows the percent for every quarter from January 2024 to April 2025. The US 30 and 10 years bonds generally increase from 4% to 4.5% for 10 year and 5% for 30 year with a dip for both in the third quarter of 2024. France 10 year bonds increase from about 2.5% to 3.2%. Germany 10 year bonds increase from 2% to 2.5%. China 10 year bonds decrease from 2.5% to 1.5%. Japan 10 year bonds increase from 0.5% to 1.5%. Text below: Source: Bloomberg, J.P.M.A.M. May 23, 2025.

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Now, just a couple more comments. The first place people tend to go when they see a budget bill that is expansionary is to think about potentially higher rates. I think this bill, this bill has been visible. The spirit of this bill has been visible to the markets for quite some time. And I would argue that in September of last year, when the 10-year in the US bottomed at almost 3.5%, that the rise to the current 4.5% level, so 100 basis point increase, is mostly a reflection of the market's understanding that Trump's going to be running expansionary fiscal policy and the impact of other inflationary policies like tariffs.

And I wouldn't be surprised to see the rates continue to drift up. The rates have been drifting up in Europe as well for different reasons. There, you've got the need for expansionary policy for Europe spending more on its own defense based on changing US policy with respect to NATO.

And you're also seeing a pretty sharp rise in interest rates in Japan. Again, for different reasons. There, the Bank of Japan is no longer propping up the JGB market as they once did. The one bond market, ironically, that continues to rally is China. But that's more a reflection of weaker growth rather than some kind of improved growth inflation trade-off.

So if we have a recession in the United States, and it's still unclear exactly whether we will or we won't, I think most evidence is pointing towards something like 1% growth, or 0.5% for a couple of quarters. If we do have a recession in the United States, bond yields would rally as they typically do.

But for me, the takeaway of this budget bill is that the equilibrium level of interest rates in a normal business cycle will be higher than they otherwise would be. And we could be flirting with a normalized 10 year in the neighborhood of 5% at some point, as all of the implications of this bill become reality.

Now, it has to go to the Senate. And we're not expecting major changes. There may be some tinkering with it. But I think for the most part, the House version of this bill is going to look a lot like the final version of the bill. And again, it passed by a single vote in the House, which is kind of amazing.

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Text: Quote of the Week. Quote of the week from the Wall Street Journal "Is Trump Trying to Destroy Harvard? The order against foreign students turns away the world's brightest". May 23. 2025. This vill be terribly damaging to America's ability to attract talented young people who bring their enterprise and intellectual capital to the US. Non-citizens accounted for more than half of the doctoral degrees in AI-related fields in 2022. Many have gone to work for US companies like Nvidia or started their own. The National Foundation for American Policy finds that immigrants have founded or cofounded nearly two-thirds (65% or 28 of 43) of the top AI companies in the United States, and 70% of full-time graduate students in fields related to artificial intelligence are international students. Immigrants have also started more than half of America's privately-held startups valued at $1 billion or more. Even if it's modified, Ms. Noem's order will echo around the world as a signal that the US is longer open to educate the world's brightest young people. Foreign students will get the message and take their talents elsewhere. China's politburo must be laughing at their good luck that their real adversary is hamstringing itself; first with tariffs that make its firms less competitive, and now with an assault on immigrant talent. Like most of US higher education, Harvard needed a jolt to return to its mission of educating open minds. But that requires reform. The Trump Administration seems to think it needs to destroy Harvard to save it. This is the opposite of making America great. J.P. Morgan

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So that's it on the reconciliation bill. Just a couple of other things. The quote of the week comes from The Wall Street Journal, which wrote about-- an article called "Is Trump Trying to Destroy Harvard? The order against foreign students turns away the world's brightest." And they had a couple of statistics in here I thought were interesting.

They cite the National Foundation for American Policy that found that immigrants have founded or co-founded around 2/3 of all the top AI companies in the United States. And that 70% of full-time graduate students in the United States in fields related to artificial intelligence are foreign students. They've also started more than half of America's privately held startups valued at $1 billion or more. And obviously, The Journal is expressing concern here that this is not necessarily a way to attract the world's brightest young people. And that they're going to get the message and take their talents elsewhere.

It's interesting as well that The Journal agrees that Harvard needed some kind of a jolt to return to its mission of educating open minds and not having such a one-sided ideological policy. And agree with the notion of some kind of reform. But that destroying Harvard to save it is not necessarily the way to go.

And I also think it's interesting that of all the places that have been expressing their opinions about their core beliefs, The Wall Street Journal, of all places, has been doing that much more consistently about what it is they believe and don't believe than places like The Business Roundtable or The Business Council.

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Text: Eye on the Market 20th Anniversary. Table of Contents. Number one Nov. 2006: A warning about subprime before the financial crisis hit. Number two Oct 2008: Investors should be bullish on government recapitalization of the US banking system. Number three December 2008: Oversold market conditions and the bovine anatomy of the global recovery. Number four Apr 2010: The flawed euro project, Lego minifigs and countries beginning with the letter "M." Number five Jul 2010: US bank stress tests are buy signals for investors; in Europe, not so much. Number six Mar 2011: The world is often a very resilient place (reflections on the Fukushima nuclear disaster). Number seven Jul 2011: The Capitol Grill and options to reduce the Federal debt. Number eight Aug 2011: The 60 Minutes muni scare and our "ARC and the Covenants" response. Number nine Nov 2013: Course of Empire and the true origins of the US housing crisis. Number ten Jan 2024: Equity markets generally bottom before just about everything else. Number eleven December 2015: The staggering cost of the Iraq War and the GOP shift away from neoconservatism. Number twelve Apr 2017: The Chart that Everyone Hates (how entitlement spending is crowding out everything else). Number thirteen Jan 2018: The beginning of the tariff wars, the lack of reciprocity and Chinese mercantilism. Number fourteen Apr 2018: A food, energy, and mineral weighted map of the United States and the Electoral College. Number fifteen Nov 2019: The Armageddonists! A cottage industry of doomsayers has been expensive to listen to. Number sixteen Jan 2021: The origins of the COVID inflation surge. Number seventeen Feb 2021: SPACs will be a disaster for equity investors. Number eighteen Jun 2021: Finally, a proper measure of industry-wide private equity performance. Number nineteen December 2021: The Vaccine Wars. Number twenty Mar 2023: A first time for everything...bank failures due to bad asset liability management. Number twenty one May 2023: A decomposition of European equity underperformance vs. the US. Number twenty two Aug 2023: The fallibility of yield curve inversion as a recession indicator. Number twenty three Sep 2023: What was I made for? We ask start-of-the-art AI models 71 questions from our archives. Number twenty four Jun 2024: Revenue-sharing, US sports league parity and soaring US sports franchise valuations. Number twenty five Mar 2025: The real pace of the energy transition. Honorable Mention: Lehman's failure, Wall Street systemic risks, geopolitics, the risks of concentrated stock positions, hydrogen, hedge funds, Congress, injunctions, law firms, tariffs and penguins.

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OK, last thing, for just as a preview, it's the 20th anniversary of The Eye on the Market. Yay! And we're working on a retrospective piece with some of the most interesting work that we've done. And we'll be coming out with that at some point this summer. And whether it's the euro project, or a view of the financial crisis, the course of empire, and the origins of the housing crisis, the origins of the tariff wars, the armageddonists, the vaccine wars.

A lot of the topics that we wrote about that were interesting and controversial, and many of which are still relevant today, are going to be included in this retrospective. And I look forward to sharing that with you. And it's going to include this-- if you're watching this podcast, not just listening to it, it's going to include this diorama that I made in 2011 out of LEGO minifigs.

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A flow chart of LEGO figures dressed as farmers, painters, a piggy bank, a knight, a banker, construction workers and a chef, and stormtroopers with a blurry Key at the bottom.

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And the diorama is meant to show the various options for solving the balance of payments crisis. And I thought this was pretty creative, even if the LEGO people weren't huge fans of this. I thought it was an interesting way to demonstrate that. So we're going to include that in the piece. And I look forward to sharing that with you. Thanks for listening. And I hope everybody had a great Memorial Day weekend. Bye.

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Text: J.P.Morgan, Eye on the Market. May 2025, Chicken Hawks: A quick note on the US budget reconciliation bill

J.P. Morgan