Trump’s vote buy­ing is leav­ing a fis­cal time-bomb for his suc­ces­sors

The Daily Telegraph - Business - - Business Comment - JEREMY WARNER

By the time you read this col­umn, the re­sults of the US midterms may be known, giv­ing some in­di­ca­tion of what, if any, im­pact Trump’s fis­cal and dereg­u­la­tory stim­u­lus has had on the bal­lot box. The US econ­omy is boom­ing, with its strong­est rate of growth since the great re­ces­sion, un­em­ploy­ment at a 50-year low and wages ris­ing at their fastest rate in nearly a decade. Nat­u­rally, the US pres­i­dent thinks that’s all down to him. Equally nat­u­rally, his pre­de­ces­sor, Barack Obama, dis­agrees. “Let’s just re­mem­ber when this re­cov­ery started,” Mr Obama said re­cently. “I’m glad it’s con­tin­ued. But when you hear about this eco­nomic mir­a­cle that’s go­ing on … ac­tu­ally, those job num­bers are the same as they were in 2015 and 2016.”

So how ef­fec­tive has Trump’s juic­ing of the econ­omy been, has it succeeded – as the pres­i­dent in­sists it has – in shift­ing the US on to a per­ma­nently higher growth trajectory, and are there lessons for oth­ers in the suc­cess the US econ­omy is en­joy­ing?

In an in­ter­view this week, Italy’s deputy prime min­is­ter, Luigi Di Maio, hailed Trump’s fis­cal stim­u­lus as a model that should be ap­plied through­out the Euro­pean Union. Is there any sense in which he is right? The short an­swer to th­ese ques­tions is not par­tic­u­larly, no, no and no.

Trump’s fis­cal stim­u­lus comes in two forms – the Tax Cuts and Jobs Act (TCJA) and the Bi­par­ti­san Bud­get Act (BBA). The first of th­ese sig­nif­i­cantly added to house­hold and busi­ness spend­ing power, the sec­ond has en­abled big un­funded in­creases in fed­eral spend­ing. To­gether, they are be­lieved to amount to the big­gest ever post-war fis­cal stim­u­lus, worth nearly $1 tril­lion over three years.

The im­pact has al­ready been con­sid­er­able. Yet it may not have been as big as Trump, and in­deed much past eco­nomic re­search on the “mul­ti­plier” ef­fects of fis­cal stim­u­lus, sug­gest it might be. Re­cent anal­y­sis by the Peter­son In­sti­tute for In­ter­na­tional Eco­nom­ics ar­gues that in an econ­omy that is al­ready op­er­at­ing at close to full po­ten­tial, the mul­ti­plier ef­fects are not nearly as large as tra­di­tional mea­sures sug­gest. The con­clu­sion is that the tax cuts and spend­ing in­creases will add only 0.5 per­cent­age points to GDP, in­stead of the 2.1 points that might nor­mally be as­sumed.

Trump’s stim­u­lus may buy votes in the midterms, but whether the econ­omy will still be boom­ing in two years’ time, when the pres­i­dent faces the elec­torate for a sec­ond term, looks far from ob­vi­ous. If he loses the House, it’ll be po­lit­i­cal stale­mate for the rest of his term, and cur­tains for any prospect of dou­bling down with fur­ther tax cuts.

What’s clear is that the US econ­omy didn’t need this debt-fu­elled booster, which can be seen as a cyn­i­cal ex­er­cise in po­lit­i­cal ma­nip­u­la­tion.

If there had been no stim­u­lus, the econ­omy wouldn’t be grow­ing quite as strongly as it is now, and you cer­tainly wouldn’t be see­ing the same de­gree of ex­u­ber­ance in stock mar­kets and busi­ness con­fi­dence. But ar­guably, growth would also have been of a more sus­tain­able, al­beit slower va­ri­ety. There is lit­tle di­rect com­par­i­son to be made be­tween Trump’s stim­u­lus and Italy’s bud­getary dec­la­ra­tion of war against the EU. Nev­er­the­less, this they do have in com­mon; both are a com­plete waste of money. Nei­ther is likely to pay for it­self by stim­u­lat­ing su­pe­rior growth.

In a blog, Olivier Blan­chard, for­mer chief econ­o­mist at the IMF, and Jeromin Zet­telmeyer, for­mer direc­tor­gen­eral for eco­nomic pol­icy at the Ger­man min­istry for eco­nomic af­fairs and en­ergy, ar­gue that there will be vir­tu­ally no eco­nomic div­i­dend from the 0.8pc fis­cal stim­u­lus Italy’s new pop­ulist lead­ers have an­nounced.

Re­mem­ber “ex­pan­sion­ary fis­cal con­trac­tion”, the idea that un­der­pinned post-fi­nan­cial-cri­sis austerity – that by re­duc­ing the deficit you would lower in­ter­est rates and un­der­pin busi­ness con­fi­dence, caus­ing the econ­omy to re­cover? That turned out not to be true, par­tic­u­larly in Italy, which un­der in­struc­tion from the EU tight­ened fis­cal pol­icy by 3pc of GDP in 2012, but saw an al­most equally fe­ro­cious fall in out­put.

Well, Italy’s lat­est act of re­bel­lion may be the op­po­site – “a case of con­trac­tionary fis­cal ex­pan­sion”. That’s not just be­cause the give­away is so poorly tar­geted. Fo­cused sub­stan­tially on a re­duc­tion in the pen­sion age and an in­crease in wel­fare, it will do lit­tle or noth­ing for the sup­ply side of the econ­omy. But it is also be­cause in an econ­omy with al­ready very high pub­lic debt – 130pc of GDP – it threat­ens to raise mar­ket in­ter­est rates, can­celling out any pos­i­tive im­pact on de­mand. And if the stim­u­lus fails to boost growth, but adds to the deficit, it might trig­ger the same “doom loop” we saw at the height of the eu­ro­zone cri­sis, where there is a run on Ital­ian debt.

The US is not Italy; it is a huge, sub­stan­tially in­ter­nalised econ­omy with a global re­serve cur­rency that ef­fec­tively obliges the rest of the world to fund its deficits. Italy en­joys no such “ex­or­bi­tant priv­i­lege”. Bound by the euro, it can only cre­ate debt with the Euro­pean Cen­tral Bank’s say so, and the ECB is not about to sanc­tion the Euro­pean-wide give­away that Di Maio calls for. Bri­tain sits in be­tween; it at least has its own cur­rency, which means it has the flex­i­bil­ity to be­have more like the US. Even so, it couldn’t get away with what Trump is do­ing. As it is, the rel­a­tively mod­est 1pc of GDP fis­cal ex­pan­sion an­nounced in the Bud­get is fore­cast by the Of­fice for Bud­get Re­spon­si­bil­ity to gen­er­ate just 0.3 per­cent­age points of growth.

So this much we do share with the US and Italy – our bud­get give­away is very un­likely to pay for it­self with the re­quired level of higher growth. The time for fis­cal sup­port is when re­ces­sion bites and the eco­nomic weather gets tough, not now at the end of a long busi­ness ex­pan­sion.

The bot­tom line is this: Trump’s fis­cal stim­u­lus is a com­plete waste of money that will add dis­as­trously to debt – to be run­ning a near-5pc deficit this late in the cy­cle is the act of a grossly ir­re­spon­si­ble govern­ment; there may be more of a case for it in Italy, which is drift­ing back into re­ces­sion, but Italy’s is an ill-tar­geted give­away that threat­ens to res­ur­rect the eu­ro­zone’s po­lit­i­cal and eco­nomic cri­sis; as for the UK, we too can ill af­ford the sup­posed end to austerity an­nounced in the Bud­get. There will be a high price to pay for today’s profli­gacy. The West will be back in fis­cal cri­sis be­fore we know it.

‘The US econ­omy didn’t need this debt­fu­elled booster, which can be seen as a cyn­i­cal ex­er­cise’

All eyes were on Washington yesterday, where Repub­li­cans and Democrats were vy­ing for con­trol of Congress as votes were cast in the US midterm elec­tions

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