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What is Trumponomics and will it take the dollar to the top?

5 Jan 2017 14:19|Conotoxia.com

The dollar has gained more than 5% against the main currencies since the results of the US presidential elections. This significant increase is related to expectations regarding economic stimulation, which was promised to be implemented by Donald Trump and the Congress (dominated by the Republicans). How realistic are these assumptions? Will the dollar continue to gain value? A commentary from Marcin Lipka, Cinkciarz.pl senior analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

Donald Trump’s economic plan is based on three pillars. The first assumes a clear decrease in taxes for consumers, as well as for companies. The President-elect also announced an increase of infrastructural expenses and a decrease in regulatory burdens. This plan got its name from creating a portmanteau using the words “Trump” and “economics” - Trumponomics.

Tax changes definitely attract the most attention. Trump wishes to reduce the amount of tax brackets from six to three. This would decrease fiscal burdens for every American citizen. According to the Tax Foundation research institute from Washington D.C., this would allow net income to increase by approximately 1% for the least wealthy, and up to 16% for the wealthiest citizens.

Trumponomics also decreases fiscal burdens for companies - from 35% to 15%. However, it’s worth noting that the real change won’t be at the 20% level. This is due to companies using different types of calculations and taxes being determined by their profits.

Nevertheless, there is not much information regarding new expenses. All we know is that a total value of new infrastructural investments will reach the level of one trillion dollars within the next ten years.

The costs of changes and chances for implementation

There are different opinions regarding the above mentioned tax modifications. According to The Tax Foundation think tank, these changes will cost between 4.3 and 5.9 trillion dollars. However, the dynamic model (this model assumes that the tax baseline will increase due to higher employment, for example) suggests that these costs will be between 2.6 and 3.9 trillion dollars.

The Tax Policy Center estimates that Trumponomics will cost 7.2 trillion dollars. This would increase the debt against the GDP by 26 percentage points. Taking into consideration the above calculations and infrastructural expenses, it seems unlikely that all of these initiatives will be implemented.

It seems more likely that the tax change will eventually be based on the assumptions presented by Speaker of the House, Paul Ryan - (R). His plan is to decrease the amount of tax brackets from six to three, as well as to decrease fiscal burdens for companies.

However, The Tax Foundation estimates that this will cost 2.4 trillion dollars. According to the dynamic model, this cost will be at the level of 191 billion dollars.

The impact on the economy

It’s really difficult to estimate the impact of these changes on the economy. This is because it remains unclear if they will be implemented in their entirety. However, OECD took on this challenge. The organization used the initial information and assumed that in the years 2017-2018, the government expenses, as well as public investments, will increase the GDP by 0.25% per year (the GDP is currently at the level of 18 billion dollars).

The OECD model also includes a decrease in taxes (from legal as well as natural persons) within the next two years by 0.5% GDP and 0.75% GDP, respectively. The estimated fiscal stimulation would increase economic growth for 2018 from the previously expected 2.2% to 3%.

According to OECD, a more rapid economic growth will only cause a slight increase in the debt against the GDP during the analyzed two years. However, the organization takes note that certain fiscal adjustments will be necessary in the long-term in order to ensure a good fiscal balance.

Consequences for the dollar

The US economy is currently operating in a very specific moment. It’s development keeping consistent with its potential, as well as with the low unemployment rate (4.6% in November), suggests a small supply of free labor force. Moreover, the Federal Reserve started the rate hike cycle long before any fiscal stimulation plans were announced (the end of 2015).

Implementing a strong fiscal stimulation would cause the necessity of a more aggressive monetary tightening. This would prevent the economy from overheating. The OECD model indicates that the long-term interest rates will reach the level of 3.6% in 2018 (they are expressed in profitability of the ten-year treasury bonds.) This is a huge change, especially taking into consideration that the interest rates have increased since the end of November by approximately 0.6% (up to 2.4%). This was one of the main reasons for the dollar’s record high evaluation.

Therefore, despite the American currency’s recent wear-off, we may still expect that it will exceed the level of 4.25 PLN within the next few quarters. Moreover, if the American fiscal stimulation appears to be more consistent with Trump’s plan instead of Ryan’s, the dollar may cost more than the euro and reach the range of 4.50-4.70 PLN.


5 Jan 2017 14:19|Conotoxia.com

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