Donald Trump is an undoubted political maverick. But is he an economic maverick too? The answer is yes and no.
Yes he’s a maverick on trade policy, arguing for the rejection of the Trans Pacific Partnership (TPP) and the renegotiation of the North American Free Trade Agreement (NAFTA). Trump has also called for a 35 per cent tariff on Mexican goods and a 45 per cent tariff on Chinese goods. This economic nationalism is a fundamental break with the free trade policies of previous Republican presidential candidates.
The answer is no with regard to fiscal policy and deregulation, where he adopts similar policies to previous Republican candidates, arguing for tax reductions and regulatory reform.
Where he is a maverick with regard to fiscal policy is in the size of the numbers he proposes. The numbers, like the candidate himself, are big, bold and brash. Trump has outlined an economic package which he says can deliver 4 per cent GDP growth (roughly double trend growth) and 25m new jobs.
The Committee for a Responsible Federal Budget (CRFB) has analysed Trump’s fiscal proposals, and confirmed they are the largest tax reductions since 1981, when President Ronald Reagan was in office. Moreover, if one includes the effect of subsequent tax rises under Reagan, Trump’s proposed tax reductions would be the largest full-stop.
During the Republican primaries, CRFB estimated that Trump’s fiscal policies would add $11.5 trillion to US public debt, but subsequent policy changes by Trump have reduced the figure to $5.3 trillion over the next decade. As a point of reference, CRFB estimates that the decadal cost of the Bush tax cuts was around $2.8 trillion. So the cost of Trump’s fiscal policy has halved since the primaries, but is still almost double that of the tax reductions implemented by President George W Bush.
The big, bold and brash message comes through again with regard to personal and business taxation. Trump wants to limit Federal tax on business income to 15 per cent. The current rate of Federal corporate tax is 35 per cent. He also wants to reduce the number of personal income tax brackets from seven to three.
The assessment of the economic impact of Trump’s proposals is fairly traditional. Yet again it focuses on the debate around static versus dynamic scoring. Trump says: “I’m going to lower your taxes. I’m going to get rid of regulation. I’m going to unleash American energy.” In this model, the supply-side stimulus from shrinking the state spurs on the private sector.
The scale of any supply-side stimulus will also depend on how much any future tax reforms are watered down on Capitol Hill. That they will be watered down is beyond doubt. Estimates suggest that full implementation of Trump’s fiscal policies could increase the budget deficit to 10 per cent of GDP by 2020. Trump-lite would push the deficit to 8 per cent of GDP. Even if “Mr Trump goes to Washington” (and is forced into significant compromise), it would result in a deficit around 5 per cent of GDP.
Many on Capitol Hill will argue that Trump’s policies could undermine GDP growth and the deficit because: first, the benefits from dynamic scoring are overstated; second, repatriation of Mexicans will reduce the supply of labour and economic growth as a result; and third, protectionist policies risk tit for tat retaliation in American export markets.
One final thought: what would a Trump victory mean for the dollar? Political uncertainty normally results in a flight to safety in the dollar. But when the uncertainty is in the US, the world is a different place. Before you short the dollar, however, remember that Trump is proposing a one-time repatriation tax of 10 per cent on corporate profits held overseas. A lot of money could head home.