Trump’s speech to congress: 5 things economists are watching
From infrastructure to deregulation and corporate taxes, the business world is hungry for details on how Trump will implement his policies
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What will his promised tax cuts look like? Which Obama-era regulations will be reversed? Will he push for an infrastructure spending plan this year?
Trump’s broad campaign promises to sharply cut taxes, reduce red tape and boost spending on infrastructure have focused on sniping at his predecessor. Yet without some further guidance on specific plans, investors might grow impatient.
“The stock market has been pricing in a pretty optimistic scenario about what policy changes under a Trump administration will look like,” said David Kelly, chief global strategist at JPMorgan Funds.
And while Trump has made ambitious pledges to accelerate economic growth, many analysts say they are skeptical much of his plan can be accomplished and are eager to hear specifics of how he would do so.
John Silvia, chief economist at Wells Fargo, notes, too, that even the country’s own Federal Reserve is likely craving more information, as it wrestles with the timing of its future interest rate hikes.
Here are five areas that economists and investment strategists say they hope to learn more about from Trump’s speech:
Trump has promised to slash the corporate tax rate from 35 per cent to 20 per cent. House Republican leaders have proposed the same cut. But they also want other changes, like making the purchase of machinery and other industrial goods fully tax-deductible to encourage more business investment.
To reduce business debt loads, Republican leaders also want to end the tax-deductibility of corporate debt. Companies with heavy debt loads could face a larger tax burden.
Whether Trump agrees with these proposals remains a mystery. He has also sent mixed signals about a proposed “border-adjusted” tax plan pushed by House Republicans, which would essentially tax imports while exempting exports.
Personal tax cuts
Treasury Secretary Steven Mnuchin said in a television interview last week that the White House wants to focus on “middle income tax cuts.” Yet the tax cuts Trump proposed during the campaign would benefit mainly wealthier Americans. Confusingly, Mnuchin had previously said that high-income Americans wouldn’t get an “absolute tax cut” from Trump’s plan.
Those contradictions suggest that the Trump campaign blueprint might be revamped. But so far, there have been few hints of how.
“It would be really helpful if we heard some details about whatever tax plan he’s going to support,” said Bob Baur, chief global economist at Principal Global Investors.
Trump never tires of vowing to eliminate the Obama administration’s health care law and replace it with a far better plan. Yet it’s far from clear what the replacement would be.
“Nobody knew that health care could be so complicated,” Trump said feb. 27.
Not something anyone wants to hear from their President.
Given its complexity and political tensions, health care could take months at least. Trump also said Monday that an improved health care plan would need to be achieved before tax reform. That could mean a delay in tax cuts for longer than investors had expected.
“If they spend the next several months dithering over this, then it means they aren’t moving forward on tax reform or deregulation,” said Megan Greene, chief economist at asset manager Manulife.
With rough political fights and uncertain outcomes looming for tax cuts and health care, the Trump proposal with the best prospect for success might be deregulation. That would be especially true if the president lays out specifics.
“It is probably the least contentious of the stimulus plans that Trump has put forward,” Greene said.
Kelly said it would be important to watch how Democrats in Congress respond to any details Trump offers on deregulation or other proposals, to gauge the potential for progress.
Infrastructure spending has bipartisan backing, but Greene noted that support tends to fall away once attention turns to how to actually pay for it.
Most analysts would like to hear more details of Trump’s promises to rebuild the nation’s roads, tunnels and airports and how he would pay for it. Steep tax cuts and a likely increase in military spending could worsen the federal government’s finances, leaving less money to spend.
Investors will want to hear that infrastructure spending “isn’t on the back burner,” Greene said.
Otherwise, it would mean long delays before major building projects contribute to economic growth. Some economists say it could take until 2019 before infrastructure projects have any real impact.
“Infrastructure will take years,” Greene said.