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Tax cuts will 'overheat' US economy

Tax cuts will 'overheat' US economy

Tim Stewart
— 1 minute read

The combination of a "poorly designed" tax package and a US$300 billion-budget deal risk tipping the already overheated US economy into recession, warns Aberdeen Standard Investments.

Policymakers have "opened the fiscal taps" on the US economy with tax cuts and a bipartisan budget deal, says Aberdeen Global Investments senior global economist James McCann.

The Republican tax plan, known as the Tax Cuts and Jobs Act and rushed through the US Congress by the end of 2017, will add just under US$1.5 trillion to the federal deficit over 10 years, said Mr McCann.

"The legislation creates a host of relative winners and losers across the economy, and is large enough to shift the dial on growth, inflation and monetary policy," he said.

The key change is a permanent reduction of the federal headline US corporate tax rate by 14 percentage points to 21 per cent.

"All together the Act represents a missed opportunity to more thoroughly reform the tax code. The tax cuts do not adequately broaden the tax base, they reduce the progressivity of the tax system and there are still too many legal opportunities for frms and higher income tax payers to avoid paying their fair share of tax," Mr McCann said.

The "poor design" of the tax package will add to public debt while implementing regressive business and personal income tax cuts with modest short- and long-term multipliers.

The US Federal Reserve, under the new leadership of Jerome Powell, is likely to "lean against" the stimulus at a time when the US economy is approaching full employment, Mr McCann said.

The recent bipartisan budget deal, which will add close to US$300 billion in aggregate over the next two years to the federal deficit, adds "further fuel to the fire", he said.

"While the Fed is expected to resist the stimulus through tighter monetary policy settings, this is unlikely to prevent a degree of overheating in coming years," Mr McCann said.

"This raises the risk that a short-term growth spurt gives way to rising recession risks later in our forecast horizon, as growing imbalances threaten to knock over the US economy," he said.

 

Tax cuts will 'overheat' US economy
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