On the whole, the U.S. economy is doing well – much better than at the start of Barack Obama’s first term in office in 2009 and better than in 2013, when Obama assumed the Presidency for another four years. GDP is growing slowly but steadily. Unemployment has fallen to below 5 per cent. Nonetheless, there are major challenges facing the country. The United States remains heavily in debt. Infrastructure development requires new stimulus. Large income gaps and limited social mobility mean that the “American dream” is unattainable for many. Trump exploited this situation during the election campaign. He promised that under him, the economy would flourish – independently of the rest of the world and by falling back on the country’s own strength.
Tax cuts for households and companies
Trump wants to boost the economy through tax cuts. For companies, he intends to slash corporate income tax from the current rate of 35per cent to 15 percent. U.S. corporate profits from overseas that have not yet been taxed in the United States are to be subject upon repatriation to a one-off 10 percent tax. With regard to income tax, he has proposed significantly simplifying the system to comprise just three tax rates: 12 per cent, 25 per cent and 33 per cent. These measures should give a small boost to GDP growth. But at the same time, state revenues will fall and the budget deficit will rise.
Investing in infrastructure
Trump would like to promote investment in infrastructure and thereby create new jobs and growth. Deregulation is to facilitate such investment. However, there are few details available so far about how exactly this is to be achieved. According to a White Paper submitted in October 2016 by his adviser Wilbur Ross, the designated Secretary of Commerce, and Peter Navarro, the designated head of the National Trade Council, which Trump is planning to create, Trump intends to promote private investment in transport infrastructure through additional tax breaks totalling US$137 billion. The idea is that this, in turn, will release private investments worth up to US$1 trillion. It remains unclear if an infrastructure bank is to be established. Such an investment programme would provide new impetus at least in the short term. Unemployment is already low, which means that wages are growing and a shortage of labour could arise – not least if Trump were to limit immigration. In the longer term, the public debt would increase.
Trade and investment policy
Protectionist tendencies are evident in trade and investment policy. Trump has identified “Buy American” and “Hire American” as priorities; and during the election campaign, he could be heard time and time again repeating the credo “Americanism, not globalism”. He wants to drop out of the Trans-Pacific Partnership. Rather than a further liberalization of U.S. trade relations, the likelihood is that trade rules will be more strictly enforced: under Trump, the United States could make increased use of anti-dumping and anti-subsidy measures. Moreover, during the election campaign, he threatened slapping punitive tariffs on China and Mexico as well as ripping up the North American Free Trade Agreement (NAFTA) and even leaving the World Trade Organization (WTO). Such isolation would be extremely damaging to the U.S. economy since U.S. companies, like their counterparts around the world, depend on international trade and the import of intermediate products from other countries.
Trump cannot radically change the economy overnight. Many measures will first have to be passed by Congress and implemented. Whether Trump can persuade Congress to fully back the planned tax breaks – including those aimed at promoting investment in infrastructure – is questionable. His economic policy is not expected to have a major impact until the second half of 2017 at the earliest. Changes to budget policy could be implemented in the 2018 financial year, which begins on 1 October 2017. Nonetheless, announced measures such as tax cuts could begin to have an effect somewhat earlier by influencing the expectations of industry and consumers. In the first few years, Trump’s tax cuts and investment plans could significantly boost the economy. The U.S. central bank – the Fed – is expected to further increase interest rates, and the dollar will continue to strengthen overall. But there are also drawbacks to Trump’s plans: the growing public debt, which is already high, and the danger of the economy overheating. In the medium to long term, a protectionist trade policy would also have a markedly negative impact on U.S. companies, which would lose both sales markets and suppliers. Moreover, U.S. exports would suffer under a strong dollar and the trade balance deficit would increase.