Cut to the gut: why Trump canceled federal aid in the U.S.
US President Donald Trump has managed to repeatedly shock his political opponents and a significant part of the public with a literal flood of unprecedented executive orders. One of these was the temporary suspension for an audit of federal aid to the states, which affected hundreds, if not thousands of different programs. While the courts have already blocked the decision, the future of the programs is in question. Why Trump made such a decision and how it relates to the US budget deficit and tax cut plans - in the Izvestia piece.
From where they were not expecting
Suspension of federal aid became a sensation that arose literally out of nothing. Many predicted active actions of the Trump administration in many directions, but such a step was not expected. The directives did not affect the Medicare and Medicaid medical assistance programs, nor did they affect funds that are given to people directly from the budget - all other payments were frozen.
Hours later, federal Judge Lauren Alikhan barred the administration from acting in this way until at least Feb. 3. The White House later said it would back off its plans for some programs, but most would still be studied and possibly revised.
In circles associated with non-governmental organizations (the main ultimate recipients of grants), these decisions caused a state of near panic. Given that Trump has decided to suspend foreign aid at the same time - here he can dispose of it on his own without getting bogged down in lawsuits - the situation is quite alarming. The suspension affects a multitude of purposes, down to free school lunches for the poor. Basically, the government is looking to cut excessive spending that was done by the previous administration for socio-political reasons.
How much is given to whom
In fiscal 2022, the amount of federal grants and other aid to states passed the trillion-dollar mark for the first time in history. And all federal aid, including not only grants but also tax credits and other types of spending, amounted to 36.4% of all state revenues, close to the historic high set in the previous year, 2021.
Normally, the rate is around 30% (and around 25% before 2008) and rises during crises and recessions. The current period was a big drag: spending continued to rise into next year.
The breakdown by state (the most recent data is for 2021) is quite interesting. California, New York, and Texas are in the lead. But that's to be expected: it's logical that the three states with the largest populations received the most funding.
New York, USA
If we take strictly grants as a percentage of the income of these or those states, there is a more unexpected picture. Both Republican (Montana, Alaska) and Democratic (New Mexico) states were in the top. The lowest percentages are also in a diverse range of states, from Democratic stronghold Vermont (12%) to strictly Republican South Dakota and Iowa (15-15.5%).
Finally, the amounts of federal grant distributions per capita also appear "politically neutral." The leader here was conservative Alaska, which received $8,600 per person. In second place is progressive Rhode Island ($6.8 thousand). Intriguingly, the largest recipients per person are the largest and smallest states in terms of territory. New Mexico, Wyoming, Delaware and New York were also in the lead.
It's worth noting an important detail: while the distribution of grants is more or less evenly distributed across different regions, regardless of their economic and political orientation, subjectively more left-leaning and liberal states are more in need of such aid.
Take California, for example, which for several years in a row has had a budget deficit in the tens of billions of dollars. By the end of 2024, it will reach $55 billion. Although this is only 1.5% of the state's GDP, it is a lot by American standards. Given the colossal damage from the fires in January, we should not expect this figure to decrease this year either. At the same time, California is constantly losing budget revenues due to the steady outflow of economically active population and entire companies. Therefore, federal aid is critical for it.
Republican states are less likely to suffer large deficits, for example, Florida is projecting a surplus at all for the next fiscal year.
Cutting costs at all costs
Auditing budget programs and optimizing spending for the US is now practically a necessity of life. The public national debt has exceeded 100% of GDP - still not critical (compared to, say, Italy), but quite unpleasant, given the dynamics. In recent years, it has become the norm for deficits to exceed the 5-6% of GDP mark per year, well above any norm.
In October 2024, the Senate Committee for a Responsible Budget calculated what the election plans of Trump and his Democratic rival Kamala Harris would cost the country. Both candidates were given a "failing grade": both would have to increase the deficit by many trillions of dollars if their programs were implemented.
But Trump was criticized more: the average estimate of his efforts is at $7.75 trillion, or just under a third of US GDP. It is precisely the additional losses to the budget that will be added to the existing ones.
Trump's plans include a new tax cut, which was one of his key campaign promises. It is unlikely to count on the fact that large American taxpayers will leave offshore en masse in honor of this reduction - this did not happen in 2017-2018. There are not many options for action, so all efforts are now focused on cutting government spending. Here, not only cutting payments to states, but also suspending international aid programs (more than $60 billion a year), as well as the creation of the Department of Government Efficiency (DOGE) headed by Ilon Musk.
U.S. President Donald Trump
The first attempt at a cavalry charge on the domestic U.S. grant system, as opposed to the international program, failed. Nevertheless, the Trump government is unlikely to back down. With a majority in both houses of Congress, a majority in the Supreme Court, and a sufficient reserve of political will, it can achieve a lot in these areas - up to tens of billions of dollars in savings per year.
The economic consequences of such actions are unlikely to be noticeable, but the social ones are very much so: in the states, especially those dependent on federal support, the situation may become explosive due to years of mismanagement. This is quite consistent with the plans of the new administration, which will gain additional leverage over disloyal regions.
