However, President Trump’s policy-making is haunted by ghosts of the past. Positive growth effects could prove to be temporary, while negative externalities would prevail:
- Ghost of President Reagan’s tax cuts. In the eighties, Reagan’s Economic Recovery Tax Act (ERTA, 1981) and Tax Reform Act (TRA86, 1986), which were similar in magnitude and ambition to Trump’s fiscal reform, did not significantly boost the potential of growth and were swiftly followed by corrective measures of tax hikes in order to bring back public debt on a more sustainable path. This concern is likely to come back as a top priority post Mid-Term elections in November 2018.
- Ghost of the Homeland Investment Act. In 2004, the HIA revised section 965 of the internal revenue code (IRC): US corporations with foreign subsidiaries could bring overseas profits at a reduced tax rate of 5.25%. One needs to remember that in 2004, only 20% of repatriated profits were used to invest, while the rest rather boosted dividends and share buybacks with limited impact on investment.
- Ghosts of pro-cyclicality, higher debt and partisanship. Late-cycle fiscal spending usually comes with small and subdued multiplier effects. In addition, the absence of a significant rebound of growth and inflation in a time of fiscal profligacy is likely to generate higher public deficits, estimated to 4.5% of GDP in 2019 compared with 3.4% of GDP in 2017. Public debt held by the public is expected to increase by more than USD 2000bn over the two coming years and should be above 100% of GDP at the horizon of 2028, compared with 76.5% in 2017.
- All in all, growth and inflation impact of the US fiscal expansion will be quite moderate, hopes for extended self-financing of fiscal expansion will be disappointed, debt will rise (as was observed in former fiscal expansions)