Donald Trump has a significant infrastructure plan

He has announced an infrastructure effort of $1 trillion over 10 years. According to the available information, this plan is meant to be deficit-neutral: a tax credit would be offered to private companies to finance infrastructure  projects and the companies would take the equity part of the projects ($167 billion of the $1 trillion would be equity investment, the rest being financed by debt raised by the private sector). This would imply that those new infrastructures would be privately held and run.

This could mean $100 billion of additional infrastructure spending per year over the next 10 years and should provide a one-off boost to domestic aggregate demand of +0.5% of GDP. Given the time lags, this support should show up mainly starting end of 2017.

On the fiscal side, Trump has advertised  a huge “Reagan-type” fiscal stimulus.

He has promised to cut taxes by $4.4 trillion over 10 years. More specifically, he has promised to reduce the number of personal income tax brackets from 7 to 3 (12%, 25% and 33%). This measure – the most costly one – would benefit mainly the wealthiest top 1%. But note that, even if the amounts in play are smaller, other proposed measures would benefit a wider public, such as allowing for full deduction from taxes of the average cost of childcare, creating a tax-free dependent care-saving account for children or elderly relatives (low-income households in particular would benefit from a $500 contribution to their savings account).

On top of those personal income tax cuts, Donald Trump is also committed to lowering the corporate tax rate from 35% down to 15%, while at the same time closing some loopholes. 

How is this tax-cuts plan to be financed?

Donald Trump has presented his plan as being “deficit-neutral”:

  • $1.8 trillion of receipts are supposed to be generated by higher growth due to the tax cuts themselves.
  • Another $1.8 trillion should come from the additional boost to growth provided by the rest of its economic plan (infrastructure investment effort, energy and trade-related  measures…).
  • On the spending side,  $0.8 trillion of public money should be saved thanks to the so-called “Penny plan” : i.e. a yearly cut in non-defence discretionary spending of 1 cent per dollar spent.

For this tax plan to be deficit-neutral, not only should the Penny plan be effectively implemented (which is not that easy!) but the rate of growth of the economy will have to average 3.5% over the next 10 years. This seems very difficult to achieve unless there is a huge reversal in the trends of both the participation rate and productivity (those interested in the numbers can look for more details on our website).

The question, of course, is whether after Donald Trump’s victory, Congress will remain as fiscally conservative as it has been. If yes, it is unlikely to agree on the “full-sized” Trump fiscal plan since this would be taking the risk of a significant deterioration of the budget balance over the coming decade. If Congress shifts to a less conservative stance, this could lead to a Reagan-type policy… and a Reagan-type increase in the public deficit.

What will happen with Donald Trump’s other proposals is uncertain.

Remember: Donald Trump has promised to act during  the first 100 days of his presidency both on the trade and on the immigration front.

  • On immigration, the measures he has proposed have been widely commented. We believe Congress is still unlikely to endorse most of them, the more so since they may be opposed by many business lobbies.
  • The international trade issue may be the most serious one, since, here, the President seems to have a rather “free hand”: according to many international trade specialists,  the President could, for instance, on his own, take the US out of NAFTA at just 6 months’ notice! Without going that far, the temptation to quickly take some visible measures on trade may be high as this would be the easiest way to show that he is delivering on what he has promised.

More details

AUDIO

by Florence Pisani, Global Head of Economic Research

Candriam's views on the US election



Our views
on
us election

Read more