The Strategist

The United States promises reforms and accelerates the economy

10/30/2017 - 14:10

The growth rate of the US economy in the third quarter was higher than expected. An increase in GDP of 3% in annual terms contributed to a jump in investment and exports. The administration of Donald Trump promises that such growth rates will be possible to be maintained if the Congress approves the tax reform. However, experts warn that a sharp increase in the budget deficit will not allow maintaining high growth in the long term.

Josh Willink
Josh Willink
The growth of US GDP in the third quarter was 3% in annual terms (following the results of the second quarter - 3.1%, in January-March - 1.2%). Despite the effects of the powerful hurricanes Irma and Harvey, this is the highest growth rate in three years, as the first estimate of data published by the US Department of Commerce shows. Support for growth was provided by an increase in capital investments (by 8.6%) and inventories. At that, growth in consumption slowed from 3.3% to 2.4%, while construction saw a slowdown in demand. Another factor of support was the trade balance: against a background of a relatively weak dollar and an improvement in the external environment, exports increased by 2.3%, while imports fell by 0.8%. Analysts on average expected the growth of the economy at 2.5%, yet, the current rate of growth may slow in the fourth quarter. So, Capital Economics says that the indicator can reach 2.1% by the end of the year, and may amount to 2.5% in the next, provided that at least a short set of tax measures is implemented.

The US White House, however, insists that the tax reform will support high growth rates, if approved by Congress. Last week, lawmakers approved the budget for 2018 and a 10-year budget plan that provides for an increase in the deficit (and national debt) by $ 1.5 trillion. On Friday, however, new estimates were made of the possible impact of the reform, so far described only in the form of a set of proposals on the economy. According to the chairman of the Economic Council of the White House Kevin Hassett, the tax cut could increase the size of the US economy by $ 0.7-1.2 trillion within ten years. The main premise of calculations is that economic growth will lead to an increase in tax revenues, which will make it possible to do without a significant increase in the budget deficit. The White House hopes that the reform will be neutral from a fiscal point of view on the horizon of ten years, provided the economy grows by 3% per year.

Most economists who did not participate in the development of the plan do not agree with such an assessment. According to the calculations of the Tax Policy Center, the reduction in tax revenues within the promised tax cut will lead to an increase in deficit of $ 2.4 trillion over ten years. The initial effect will be positive - the volume of output will reach the level of potential. In the long term, however, tax cuts will lead to lower rather than higher growth rates due to pressure on the budget, analysts of the center explain. Yet, such a significant increase in the deficit will require a more complicated procedure for approval in the Congress - this will require 60 votes in the Senate, while a simple majority - 50 votes – will be enough for approval of the tax plan that does not go beyond the deficit beyond $ 1.5 trillion (now Republicans have 52 seats).