Major Spending Cuts Coinciding with Steeper Tariffs Risk New Round of Inflation
Senate and House Republicans may be closing in on a budget agreement that extends the 2017 tax cut and makes large cuts in federal spending. Meanwhile, President Trump unveiled more tariffs that he claims will boost domestic manufacturing and fill the government’s coffers.
There is widespread fear the combination of significant spending cuts and more tariffs will slow the economy and push up prices, potentially replicating stagflation that plagued the nation in the 1970s. The tariffs are strikingly different than Trump’s Day One pledge to bring down inflation. Trump aides insist inflationary effects are overblown.
The European Union and China have pledged to retaliate.
Trump, who refers to his “Liberation Day” tariffs that go into effect Saturday, dismissed concerns by economists and Wall Street. “[Tariffs] are not going to be wrong. It is going to work. And the President has a brilliant team of advisers who have been studying these issues for decades,” White House press secretary Karoline Leavitt assured reporters.
Photo Credit: John Shinkle/POLITICO
Republican Budget Agreement
Senate Majority Leader John Thune has signaled a compromise with the House has been reached and a budget will be ready for votes in both houses soon. The House-approved budget called for its Energy and Commerce Committee to exact $800 billion in spending cuts, which observers say is likely to mean sharp reductions in Medicaid.
Republicans who control both the Senate and the House are using budget reconciliation rules, which effectively prevents a Senate filibuster. Democrats unanimously opposed the House budget and Senate Democrats are expected to follow suit.
A critical parliamentary question is whether the budget bill can include a tax cut extension. The Senate parliamentarian must decide on the Republican strategy to treat the tax cut extension as costing nothing under the “current policy baseline” rule. The actual revenue loss estimate for extending the tax cut is $4.5 trillion through 2034.
“What we are doing by extending existing tax policy is just that,” Thune said of the maneuver. “Senate Republicans don’t believe that should have to be offset or paid for. You’re simply extending what already exists.” At least one report indicates Thune may ignore the parliamentarian’s ruling, if necessary..
Senate Democrats criticized the current policy baseline approach, calling it an “unprecedented gimmick that would upend budget law, erode the remaining fiscal guardrails in the budget reconciliation process and result in trillions of dollars more in federal debt.” Senate Minority Leader Chuck Schumer said, “If [Republicans] go down this road, you will be destroying the last vestige of fiscal discipline left in the reconciliation process.”
Oregon Senators Ron Wyden, the ranking Democrat on Senate Finance, and Jeff Merkley, the ranking Democrat on Senate Budget, warned in a letter, “No longer would new tax cuts or spending programs ever need to be offset. The lasting consequences to our national debt will be severe.”
More Trump Tariffs
At a Rose Garden ceremony attended by workers in hardhats, Trump declared a national emergency and signed an executive order imposing a 10 percent tariff on all $3.3 trillion in annual imports and higher tariffs on 60 countries Trump officials say have the largest barriers to U.S. exports. “Worst offender” nations such as Japan and South Korea will face higher tariffs.
“For decades, our country has been looted, pillaged, raped and plundered by nations near and far, both friend and foe alike,” Trump said. “But it is not going to happen anymore.” In his comments, he referred trading partners as “foreign cheaters” and “foreign scavengers”.
“In the face of unrelenting economic warfare, the United States can no longer continue with a policy of unilateral economic surrender,” Trump said. Trump and his allies see this as the start of an epic campaign to reverse more than three decades of ill-conceived economic policy and inaugurate a new “Golden Age” of U.S. manufacturing.
The Washington Post reported, “American importers, for example, will pay an additional 34 percent tariff on products from China, some of which already face 45 percent fees. Vietnam, which the administration says has become a transshipment point for Chinese companies seeking to dodge U.S. tariffs, will see its goods hit with a new 46 percent tariff. Cambodian goods, likewise, will be charged an additional 49 percent levy.”
No new tariffs were announced for Canada and Mexico.
Trump aides who calculated individual nation tariffs said Trump cut their estimates in half, calling it a “discounted rate”. “The President is lenient, and he wants to be kind to the world,” one senior administration official said.
In anticipation of the tariff announcement, U.S. financial markets were sharply down. Reactions were predictable.
“In the short run, the effect is probably a recession. It’s going to raise the price of so many goods that can’t be made in the United States,” economist Brad Setser of the Council on Foreign Relations told The Washington Post. “In the long run, it’s a vision of the U.S. that is very isolated from the world.”
Jay Timmons, president of the National Association of Manufacturers, said his members operate on thin profit margins and cannot absorb the tariffs. Small businesses and restaurant owners issued statements decrying their added costs.
“This is catastrophic for American families,” said Matt Priest, president of the Footwear Retailers and Distributers of America.
The Gulf Coast shrimp industry was among those that welcomed the tariffs.
A February Gallup poll indicated 81 percent of Americans regard foreign trade as more of an economic opportunity than a threat.
Senate Vote on Canadian Tariffs
Four Republicans joined Senate Democrats to approve a resolution that ends the emergency Trump declared in imposing tariffs on Canadian imports. Senator Tim Kaine, D-Virginia, who sponsored the resolution along with Senator Rand Paul, R-Kentucky, said Trump has abused his emergency powers under the 1977 International Emergency Economic Powers Act.
Along with Paul, GOP Senators Mitch McConnell, Susan Collins and Lisa Murkowski vote for the resolution that passed 51-48. “It’s crucial that we remain a dependable and vibrant global trading partner, particularly with Canada,” Collins said. She cited the negative impact of tariffs on aquaculture, manufacturing, tourism and other industries. Murkowski and Collins represent states that border on Canada.
Trump based his executive order on the flow of fentanyl from Canada into the United States. U.S. Customs and Border Protection said only 43 pounds of fentanyl was seized at the Canadian border in 2024.
Trump responded to the Senate vote on Truth Social by criticizing the four Republicans who voted for the resolution, “They are playing with the lives of the American people, and right into the hands of the Radical left Democrats and Drug Cartels.” He also said he wouldn’t sign the resolution. His post also contained a puzzling reference to tariffs on fentanyl.
