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Trump’s Fiscal Plan Stirs Rife Debate Over Budget Deficit

© AFP 2023 / MOLLY RILEYRepublican presidential nominee Donald Trump takes the stage for a campaign event at Fredericksburg Expo Center August 20, 2016 in Fredericksburg, Virginia
Republican presidential nominee Donald Trump takes the stage for a campaign event at Fredericksburg Expo Center August 20, 2016 in Fredericksburg, Virginia - Sputnik International
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Although Donald Trumps’ economic plan is poised to spur growth, the consequences for the budget are unclear, and a projected quicker pace of borrowing stirs some concern.

U.S. Republican presidential nominee Donald Trump appears at a campaign roundtable event in Manchester, New Hampshire, U.S., October 28, 2016 - Sputnik International
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Kristian Rouz – The US president-elect’s pledge to boost economic growth via a massive fiscal stimulus package, which would include, most prominently, personal and corporate tax cuts and greater infrastructure spending, has produced a divide in opinions over the federal budget.

The massive fiscal effort would initially entail substantial losses to the budget, only to be made up for in a medium-term perspective, when the Laffer curve effect kicks in, capitalising on a higher tax base.

Yet, most Republicans are on the fiscal austerity side, seeing Donald Trump’s proposed planning as potentially too harmful to the budget in its current state. The banking sector, on the contrary, has welcomed the looming deregulation and higher base interest rates, bracing for higher profitability and sustainability of their operations.

“You can’t just like spending that your party wants and dislike spending that the other party wants,” Rep. Mick Mulvaney (R, SC) said.

Indeed, the aggregate amount of the US federal government’s borrowing has been increasing every year of the Obama administration, resulting in the national debt having nearly doubled over the eight years, from roughly $10 trln to $19 trln. However, the value of US Treasury bonds has not been affected but such a massive increase in supply, the Treasuries have been gaining in value last two years, with the yields remaining subtle up until Trump’s election.

U.S. Republican presidential nominee Donald Trump appears at a campaign roundtable event in Manchester, New Hampshire, U.S., October 28, 2016 - Sputnik International
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The type of spending the Democratic Party has been advocating is, however, different in letter and spirit. Higher social spending does not immediately boost the productive forces of the economy, it only affects the quality of life, which does not have an immediate monetary equivalent.

On the contrary, Trump’s increased spending on infrastructure and the military is an immediate injection on huge volumes of money into the two of the largest sectors of the national economy. Meanwhile, tax cuts are essentially an injection of money into domestic consumption that drives some 72pc of the US GDP, and into corporate balance sheets, allowing them to mend their battered competitiveness in the domestic and international markets.

Yet, that is all just the theory. The US budget, meanwhile, is now in a lot worse place than it was back in 2010. According to the estimates by Congressional Budget Office (CBO), over the next four years the budget deficit would stand at an average 3.2pc GDP if no action is undertaken. Under the House Republicans’ tax plan (more ‘austere’ fiscal stimulus), the deficit would broaden to 5.3pc GDP, and under Trump’s unprecedented stimulus, the deficit would be at 6.8pc GDP by the end of Trump’s first term.

However, these estimates are not quite precise because the positive or negative effects of the stimulus to GDP are impossible to quantify. Therefore, we do not know what the US GDP would be by the end of Trump’s first term.

Demonstrators protest against the legislation to give US President Barack Obama fast-track authority to advance trade deals, including the Trans-Pacific Partnership (TPP), during a protest march on Capitol Hill in Washington, DC, May 21, 2015. - Sputnik International
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Trump is facing a tougher challenge than Ronald Reagan or George W. Bush, the two presidents whose economic policies were characterised by a significant fiscal stimulus effort. When Reagan took office in 1980, the budget was running a surplus of 2pc GDP over the following five years, and the national debt-to-GDP was 25pc in 1981. With Bush, budget surplus was projected at 3.3pc in 2001, and debt-to-GDP was 31pc.

Now, US debt-to-GDP is 77pc due to dismal growth over the past eight years and the massive borrowing. Most of the borrowed funds redistributed within the economy failed to convert into US economic growth, with it being squandered on imports consumption supporting growth overseas amid general mismanagement at home.

“Based on the expectation that the American President and Congress are likely to act on taxes, and perhaps on regulation as well, I think there is a slightly more positive outlook for the American economy over the intermediate horizon,” Bjorn Wahlroos, chairman of Nordea Bank AB, said.

“It remains to be seen whether Trump’s negative stance on some issues such as free trade will over the longer run have a negative impact. But over the short term, his approach to taxes and implicit promise of tax cuts, particularly corporate taxes, have a positive outlook,” Wahlroos added.

Despite the hard situation for the US budget, as increased borrowing over the short-term would contain the value of the US Treasuries, which is still supported by their status as safe haven asset. With yields higher, the higher the natural interest rate, and, subsequently, the higher the US Federal Reserve’s base borrowing costs. All that would attract investment capital in the US at a faster pace, and with negative rates in Europe and Japan, the US is uniquely positioned to improve their infrastructure and revitalise their productive forces for cheap.

“We’re just going to throw it up against the wall and see if it sticks,” Stephen Bannon, Trump’s chief strategist said.

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