Elon Musk and Trump's "governance" blueprint: A fiscal austerity storm that rivals the Thatcher era?

According to Zhitong Finance APP, as Musk continues to advance his policy proposals, the Trump administration may lead an economic transformation comparable to the Thatcherism of the 1980s in the UK.

After Musk took charge of the newly established "Department of Government Efficiency" (DOGE) in the White House, he proposed a radical fiscal reform plan: to cut $1 trillion in federal spending within the next year—an amount deemed highly unlikely to be achieved by many economists and budget experts. This is partly because cutting such a large amount of spending would be extremely difficult without touching welfare programs like Medicare and Social Security, which Trump has promised to protect.

However, the $1 trillion figure reflects their ambition and their determination to implement what is essentially equivalent to economic shock therapy. In fact, in terms of the proportion of Gross Domestic Product (GDP), the scale of fiscal tightening envisioned by Musk would exceed the measures taken by Thatcher in the 1980s, when the Iron Lady significantly reduced UK government spending to offset budget deficits and combat inflation, ultimately triggering a recession, for which she expressed no regret.

Currently, federal spending accounts for about a quarter of the US GDP, so even a cut that is only a small fraction of what Musk anticipates could impact the economy at a time when it is already tense due to slowing risks.

The Trump administration's efforts also share similar ideological goals with Thatcher: significantly reducing government involvement in various areas from infrastructure to innovation, believing that doing so will unleash the vitality of the private sector.

Treasury Secretary Bessent has spoken about the need to quickly reduce the budget deficit to 3% of GDP, less than half of the current level, and to ensure that the government no longer hinders business development.

"Our goal is to re-privatize the economy," Bessent stated in a speech last month. He pointed out that over the past year, government, education, and healthcare jobs accounted for 95% of all jobs in the US, which is "neither desirable nor sustainable."

"The market and the economy have become addicted to government spending," Bessent said in an interview on March 7, indicating that "there will be a withdrawal period."

The market's assessment of these remarks is quite pessimistic.

However, Stephen Milan, the incoming chairman of the Trump Economic Advisory Council, and Commerce Secretary Howard Lutnick share similar views, believing that the government is an inefficient drag. Lutnick has also proposed a plan to increase revenue by $1 trillion through new tariffs and other means.

In the seven weeks since taking office, the Trump administration has already formulated a plan to cut over 100,000 federal jobs, while economists predict that up to 500,000 federal employees may lose their jobs this year. The prospect of significant cuts has already triggered financial reckoning among local governments, universities, and other institutions that rely on federal funding for everything from scientific research to social services to transportation projects.

Analysts from the nonprofit organization "Transportation for America" estimate that over $20 billion in federal grants in the transportation sector alone may be at risk of cancellation, as the government cuts spending under the pretext of opposing climate change and social justice measures This could mean the suspension or delay of hundreds of road and transportation projects nationwide.

Martha Gimbel, executive director of the Yale University Budget Lab, stated, "The federal government is a crucial part of the U.S. economy, and if you make significant cuts, it will create a ripple effect. Even if you do these things in a way that gives people time to adjust, it will still be very painful."

This pain could have political consequences for a president committed to prosperity rather than austerity—who has already reclaimed control of the party from deficit hawks.

Trump has stated that his goal is merely to root out improper payments in welfare programs, while Musk listed widespread fraud in Social Security as a potential target for cuts on Monday.

"There is a lot of fraud," Musk said in an interview, claiming without evidence that DOGE has found evidence of people illegally applying for Social Security benefits and Small Business Administration loans. "It's estimated that this accounts for about 10% of federal spending, or $500 billion."

Musk portrays his agenda as a fiscally prudent measure for a nation burdened with $36.5 trillion in debt, with annual interest payments comparable to the Pentagon's budget.

"This is not optional; it's a necessity. That's why I'm here," Musk said at a cabinet meeting on February 26. He proposed a goal of cutting $4 billion in spending daily from now until September. "If we don't do this, America will go bankrupt."

This also reflects his deep-seated disdain for government, which extends beyond the regulators of his companies. Musk implied that federal workers are inefficient and suggested that the public sector should not even be included in economic metrics. He recently condemned John Maynard Keynes as a "great villain," showing contempt for the economist's belief in government as a stabilizing force in the economy. However, often overlooked in his lengthy diatribes is how his companies benefit from government loans and contracts.

As Musk's austerity plan emerges, congressional Republicans are proposing a tax bill that includes $2 trillion in cuts over the next decade while still increasing the deficit. Achieving his goals may involve cutting spending that Congress has already authorized, which the U.S. Constitution grants Congress the power to control.

Opponents argue that this is illegal, and lawsuits have questioned the constitutionality of Musk's proposed cuts.

The looming risks of a new era of austerity have already caught the attention of prominent investors, including billionaire founder Steven Cohen of Point72 Asset Management. Last month, he stated at a conference, "Regardless of your stance on the DOGE issue, that is austerity." And austerity "will inevitably have a negative impact on the economy."

According to statistics, if federal spending decreases by $1 trillion this year, the U.S. will fall into recession, with GDP contracting each quarter, and the economy shrinking by 3.3% more than expected. (This estimate does not account for other policies that could drag down the economy, such as tariffs or immigration crackdowns, nor does it consider the potential positive effects of tax cuts and deregulation as claimed by the Trump administration.) Anna Wong, the chief economist in the United States, stated that this will also lead to an increase in the unemployment rate by 1.5 percentage points, reaching 5.7% by the end of the year. For Republicans, perhaps the good news is that under these circumstances, "economic growth will rebound strongly next year," Wong said, coinciding with the midterm elections.

The speed of the cuts is one reason for their severe impact.

Musk's overall goal means that the annual spending cuts amount to 3% of GDP. Robert Pollin, an economist studying government austerity measures at the University of Massachusetts, noted that even at the peak of the Thatcher austerity movement, the UK's annual cuts were only equivalent to 1 percentage point of GDP. It is reported that Thatcher's austerity policies triggered an economic crisis in the UK, and it was only after the economy recovered that the Conservative Party celebrated her.

Such large-scale spending cuts proposed by Musk have almost no precedent in modern American history. The only two larger cuts occurred after World War II and in 2022, when the pandemic stimulus spending led by Trump and Biden was reduced in 2020 and 2021.

"We are entering a whole new realm," Pollin said regarding Musk's plan.

Indeed, even if lawsuits do not stop his plans, Musk may still be unable to achieve the $1 trillion reduction target. This has led economists and bond investors to scoff at Musk's ambitious goals.

However, even if he only achieves partial success, it will have an impact on the economy. Bloomberg Economics found that approximately $100 billion in spending cuts would lead to a 0.3% decline in U.S. GDP this year.

In an economy where federal spending accounts for about one-third of state budgets, this impact could be widely felt.

This could also hit Trump's own supporters. Thatcher won elections after initiating austerity measures, but that does not mean the Republicans can do the same. Andrew Reamer, a public policy expert at George Washington University, stated that in the 31 states Trump won last November, 30 states received more federal funding than they paid in taxes to Washington.

Reamer wrote in a recent article, "The budgets of states that vote for Trump in 2024 are more likely to be affected by cuts in federal aid than those that vote for Harris."