More Growth, More Jobs?
U.S. President Donald Trump has announced that his goal for average annual economic growth during his Presidency is 3.5 - 4 per cent. That would be significantly higher than the growth achieved in 2014 (2.4 per cent), 2015 (2.6 per cent) and 2016 (preliminary estimate of the U.S. statistics agency BEA: 1.6 per cent). Trump wants to boost economic growth by, above all, introducing tax cuts, reducing the bureaucracy and red tape as well as investing in infrastructure. Moreover, he wants to support domestic industry and create new jobs by protecting it against what he perceives as unfair competition from abroad. Companies should produce in the United States rather than invest abroad, otherwise they could face a higher tax burden, Trump warned.
Trump Cannot Implement His Plans Easily
It appears that Trump’s announcements are already having an impact, as shown by the Dow Jones index. However, to achieve faster growth in real terms, the Trump administration must follow up words with political deeds. In order to implement tax cuts or increase infrastructure spending, Trump needs the approval of Congress. For this reason, his economic policy is not expected to have any major impact until from the second half of 2017 onwards at the earliest. Any changes to fiscal policy can be implemented only at the beginning of the 2018 financial year, which begins on 1 October 2017. The failure of the Republicans health care overhaul shows that Trump will have a hard time getting his initiatives through Congress.
Debt Burden and Economic Nationalism Will Curb Growth in the Long Run
If Trump were to fully convince Congress of his plans, the mix of tax cuts and infrastructure spending could very well boost short-term economic growth. And the protectionist trade policy announced by Trump would offer U.S. companies temporary shelter from global competition.
However, Trump’s plans are in danger of backfiring in the long term. Introducing tax cuts at the same time as increasing spending without having secured additional income would raise both the budget deficit and the already high level of public debt. The Federal Reserve has signalled that it is likely to increase interest rates further in 2017 if growth continued. While this would have a positive impact on foreign investment flow into the United States, the resulting higher demand for the U.S. dollar would likely be negative for U.S. exports and could further increase the trade deficit.
Tariffs would make intermediate goods, which producers in the United States are currently importing from abroad, more expensive. It would be the consumer who would end up footing at least part of the bill. The United States could lose both markets and suppliers, while isolation would likely reduce the competitiveness and innovative strength of U.S. companies in the long run.
The Risk of Uncertainty and Protectionism
As things stand at the moment, it is unlikely that Trump will achieve his goal of 3.5 per cent growth in the current year. The IMF estimates (January 2017) the economy to grow by 2.3 per cent. In comparison to other industrialized countries, this is anything but bad. However, in the long run, the outlook could change. The latest forecasts of both the World Bank and the IMF point to the uncertainty that President Trump has generated and warn about an increase in protectionism. This would have a negative impact not only on the United States but on the world economy as a whole.