Elon Musk’s Herculean task

US federal government spending hit $6.75 trillion in 2024, well above tax receipts of $4.9 trillion. This meant the US government needed to borrow of $1.8 trillion. Markets and the new administration think the deficit is too high, so President Donald Trump is looking for expenditure reductions as he has no wish to raise taxes further.

With the economy growing well, it would be more normal to be running a deficit of less than $1 trillion. Getting spending down by around $1 trillion would be difficult. Elon Musk, who is leading Mr Trump’s efficiency drive through the Department of Government Efficiency (Doge), famously said he thought he might get spending down by $2 trillion, but this was clearly not a forecast for the first year.

Mr Musk has advised the president that there are many economies that can be made in government overheads by slimming bureaucracy, reducing the number of regulations it administers and reducing grant-giving programmes. The president has identified spending on net-zero policies as a prime target for reductions and is hostile to the overseas aid budget. Pre-election, there was discussion about abolishing departments such as Education and merging public bodies.

Normal ways of reducing public spending

Democratic governments review with their officials how to contain spending growth by making selective cuts. They sometimes identify programmes that they can do without. They reduce or fail to increase grant and benefit levels. They look to transfer some activities out of the public sector into the private sector, where the costs and investment expenditure then fall outside the public budgets. They seek to raise public-sector fees and charges to bring in more revenue. They contract out the delivery of activities where that can result in savings. Where they wish to abolish public bodies and whole programmes, legislation is usually required. This means elected representatives get to debate and vote on the matter.

The politicians favour productivity gains, offering more service for less money. These are difficult to achieve. Officials often want to introduce spend-to-save projects, where they promise to reduce the employment cost of an activity after there has been substantial spend on labour-saving technology and a delay in doing it.

If pressed they will accept a staff recruitment freeze to start to lower staff numbers, if there is an ability to get permission for more external recruitment where they need special skills or are continuing pressures. Sometimes voluntary redundancy schemes are accepted, giving some people the chance to move on with a substantial payment whilst reducing manning levels.

The Musk approach

Elon Musk is said to be a special government employee. This means he is temporary and not paid. Many rules of conduct for government employees will still apply to him, including rules over conflicts of interest. It seems that he needs Presidential or Secretary of State authority for anything he proposes, but he and a small team are said by some to act as if they have executive power.

He does not seem to have to make more disclosures of his wide-ranging interests, though his biggest business activities are well known and made public by the companies making their own disclosures. He will presumably exempt himself from any matters where his companies benefit from government links.

The president has agreed to a staff freeze to start to slim down the size of the bureaucracy, and to an offer made to most non-uniformed federal employees of voluntary severance with eight months’ pay. All office staff have also been told they are expected in the office five days a week instead of many of them working from home for part or all the week.

The federal total of employees excluding military personnel is around 2.4 million. The largest employers are Veterans, Home Security, the civilian defence establishment and the Treasury. If he achieved a 10% reduction through natural wastage and the resignation programme, that would save 240,000 salaries and overheads, which would give a saving of about $20bn-$30bn. This shows that it will take much more than a productivity drive to correct the US budget deficit.

So far, Mr Musk has concentrated especially on a single government Agency, US AID. His people have demanded access to the financial documents, meeting resistance as they are classified. Senior people have left the agency, and the agency has been told to suspend payments pending a thorough review of every line of budget spending.

The agency, we are told, is to be wound into the State Department. Secretary Marco Rubio is now the titular head, and he has delegated the function to another. He clearly agrees with the current policy proposed by Mr Musk of the merger, the payments suspension and the review. On the ground around the world, there are difficult decisions for employees of the agency to make where there is uncertainty about payments to continue with their work.

US AID has a budget of $40bn. Assuming some of its work will continue after the review, some of the staff will presumably be needed at the State Department after the merger. Presumably, they are a target because President Trump disagrees with quite a lot of what they give out and to whom. He wishes to show the world how much the US does give and wishes to reshape the gifts dramatically. If the merger and spending reduction of US AID works, it will presumably be a model for other mergers and closures of agencies. So far it is a battle for control, with a strong wish for a Trump loyalist in the person of Mr Rubio to be making the decisions about who gets what money.

The resistance to the US AID changes

There are challenges to the way Mr Musk is going about the closure and cutting of this agency’s work. Federal employees may pursue challenges if they regard themselves as dismissed without due process. The Democrats will query the legality of abolishing the agency and question the way instructions have been given to the senior staff. The staff themselves will be unsure how to proceed as there is a lack of clarity about existing programmes and contractual commitments. The unions have gained a temporary reprieve in court from placing 2,200 workers on paid leave.

To land what he wants to do, Mr Musk needs to complete his review to set out how many staff and how much of the current work is to transfer to State and how much can be shut down. There would need to be proper redundancy processes. He and his team are meanwhile struggling to get access to all the documents they need to conduct their full review of activity and budgets. They are releasing to the press some of the items of spending they think most inappropriate.

Will the deficit fall?

It seems unlikely the actions undertaken so far will make a major cut in spending and the deficit. It is difficult to forecast how many staff will accept severance, and difficult to judge how much will be spent on overseas aid after the action against the lead agency. Given the base numbers, a success in Mr Musk’s terms could make a change in the tens of billions, not in the hundreds of billions of dollars needed to have a large impact on the deficit. There could be savings to come from changes to net-zero policies not yet set out.

Regularising or landing Mr Musk’s approach to spending reduction by achieving a better outcome at US AID is important to the whole programme of spending containment. Any signs of weakness by the politicians could, of course, be used to delay or blunt the process. A very confrontational approach could lead to legal roadblocks and to great difficulty in managing the wider public-sector workforce who remain crucial to delivering public services.