Deficit danger: How US economists are bracing for election result

Another Donald Trump presidency, with a Republican-controlled Congress, would be an adverse outcome for the United States’ federal fiscal deficit, an economist in New York warns.

“Here in the United States, it’s not the president, it is Congress that decides fiscal policy,” Aurora Macro Strategies chief economist Dimitris Valatsas told the Herald’s Markets with Madison.

“So the composition of Congress will matter at least as much, if not more, as who is going to be the next President.”

He warned the fiscal deficit would likely increase more under Trump’s Republican rule than it would under a Kamala Harris-led nation and majority-Democratic Congress.

“The promises he [Trump] has given of significant tax cuts are generally estimated to be far larger than the ones that Democrats have.”

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Deficit danger

The United States federal Government’s deficit totalled US$1.83 trillion ($3.06t) in October according to its Treasury — an increase of 8% or US$138 billion on October 2023.

It marks the third-largest deficit in US history, according to Reuters, third only to the pandemic years of 2020 and 2021.

“The United States federal deficit is a little bit like those fancy credit cards. They don’t tell you what the credit limit is. But the only way to find out is by hitting it,” Valatsas said.

“And I think that’s what has economists concerned, is that we might be getting closer to actually hitting the credit limit of the US federal deficit.”

However, Valatsas was confident the US could continue to live beyond its means because of its “exorbitant privilege of issuing the US dollar”.

“I think more than any other economy in the world, the US can live beyond its means,” He said.

“That is a consequence of being the centre of global finance and issuing the reserve currency.

“But, I would caution, it’s not a given forever.”

Aurora Macro Strategies chief economist Dimitris Valatsas says Donald Trump's proposed immigration and tariff policies would be inflationary to the US economy.

Trump could deepen the deficit by US$7.75 trillion, and Democratic candidate Kamala Harris could add US$3.95t, analysis of candidate campaign policies from the non-profit think tank Committee for a Responsible Federal Budget suggested.

The analysis outlined the largest costs from each candidate, with Harris’ being the extension of the Tax Cuts & Jobs Act (TCJA) for those earning less than US$400,000 and expanding some tax credits.

Harris’ proposed plan to recoup some of that spend was by increasing the corporate tax rate to 28%, among other policies.

Such a move would be the largest increase in the developed world in 50 years and apply to a large tax base, the chairman of the Council of Economic Advisers during the Trump Administration, Kevin Hassett, told Goldman Sachs Global investment research.

“Such a damaging tax would certainly be recessionary,” Hassett wrote in Goldman Sach’s Top Of Mind October research note.

The former Trump Administration decreased the corporate tax rate to 21% from 35%, which increased capital spending between 10% and 20%, he said.

The largest costs from Trump’s plan would be extending and modifying the TCJA to a larger degree, exempting overtime from taxes and ending taxation on social security benefits, according to the Committee for a Responsible Federal Budget analysis.

Other, albeit lesser, costs included strengthening the military and deporting unauthorised immigrants from the US.

Trump’s proposed tariffs on imported goods could earn about US$2.7b, the analysis forecast.

However, a universal tariff was not a sure thing, Hassett wrote.

“While the president can enact some trade policies that address specific national security or anti-dumping concerns without congressional approval, a broader reciprocal trade act or universal tariff would require legislation.”

US analysts and economists largely expected the US Federal Reserve to keep cutting interest rates, despite the presidential election result.

Inflation & immigration

Dimitris Valatsas said Trump’s tariffs on imported goods would be inflationary if implemented, maybe causing the Federal Reserve to respond, possibly by pausing or slowing its rate-cutting cycle.

“They’re a direct tax on goods that Americans consume. That would raise CPI (consumer price index) in a very straightforward manner.”

“I think the Fed would probably have to respond in some way, perhaps by being more cautious in cutting rates while it waits to see what the actual impact is on the economy.”

“Kamala Harris has spent little time discussing trade,” he added in a new research note to clients on Tuesday.

“She has yet to offer evidence that she will significantly break from her predecessor’s approach, which has largely been a continuation of the policies implemented under Trump’s first term in office.”

Immigration was also a big component of Trump’s plan, he told Markets with Madison.

“If there are severe restrictions placed on immigration, I think we would expect that to have inflationary consequences, take some supply out of the labour market and put upward pressure on wages.

“The Fed would surely take note of that.”

The Federal Reserve cut its wholesale interest rates for the first time in four years in September, opting for a 0.5% move.

The market was overwhelmingly expecting it to cut again, by a smaller 0.25%, next week.

The pace of measured inflation growth was returning within the Federal Reserve’s target range,

However, Americans did not necessarily feel better off, according to Jared Bernstein, the Chair of the Council of Economic Advisers in the Biden Administration.

“People remember what the things they regularly consume used to cost before the pandemic-related surge in inflation and many are uncomfortable with the higher price levels they face today,” he told Goldman Sachs Global Investment Research.

That was despite the US economy providing a solid macroeconomic backdrop for an incoming president, he said.

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Madison and video producer Corey Fleming travelled Auckland-New York courtesy of Qantas.

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Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.

Madison Reidy is the host and executive producer of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.