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US fiscal stimulus only a short-term fix

US fiscal stimulus only a short-term fix

Reporter
— 1 minute read

Donald Trump's success in last week's presidential election raises the likelihood of massive fiscal spending in the US, but the economic benefits are only likely to be short-term, says Standard Life Investments.

Though Republican candidate Donald Trump’s victory makes the already difficult act of predicting a new president’s policy agenda even more uncertain, Standard Life Investments chief economist Jeremy Lawson said there are certain policy areas where “significant change is coming”.

“Both Trump and congressional Republicans have placed large individual income and corporate tax cuts at the heart of their policy agendas and follow-through should be swift,” Mr Lawson said.

“Defence spending and infrastructure investment should also increase meaningfully, though spokespeople for the Trump campaign have hinted that most of the financing for the latter will come from the private sector.”

Mr Lawson said cuts to Medicaid and discretionary programs were also likely, but added that these were unlikely to offset the tax cuts and increased spending in other areas.

“Our best guess is that there will be a raw fiscal stimulus equivalent to 1.3 per cent of GDP in 2018 and another 0.3 per cent of GDP in 2019, acting mostly on the demand side of the economy,” he said.

“The actual impact on growth is likely to be smaller than the raw stimulus once we take into account plausible multipliers, crowding-out effects and a higher path for policy rates and the dollar.”

While corporate tax reform is “a good idea”, Mr Lawson said changes would be better if they were revenue neutral”. Likewise, an increase in infrastructure spending is a “welcome” idea but “there is a strong case for that to be publicly funded”.

“Given the long-term budget challenges facing the country, permanent income tax cuts that do not pay for themselves and mostly accrue to the highest income earners will worsen the fiscal position but provide only a very short-term economic gain,” Mr Lawson said.

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US fiscal stimulus only a short-term fix
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