Un-Keynesian

It's a crying shame the alleged "collusion" between Trump's campaign and Russia came out when it did - about the same time as POTUS appears to be within grasps of tucking his first legislative win under his belt.

Oh yes, this refers to the long-promised, much-awaited tax cuts. It passed the US Senate on the 2 December with a 51-49 vote, paving the way for the corporate tax rate to be lowered to 20% from the current 35%.

Ole! Ole! Ole! Good news for Wall Streeters. Factset reports: "Deutsche Bank noted that even with the recent rally, only about a third of the benefit of tax reform has been priced in to the market." So there's still another two-thirds waiting to be embedded in market pricing when president Trump signs the tax cuts into law in Uncle Sam county (reportedly before Christmas).

But while our American brothers may have themselves a merry little Christmas in 2017 and the next couple of years, the longer term picture is not that jolly.

It's because of the deficit the US government would incur as a result. Reports had it that the tax cut would cost the government US$1 trillion versus the benefit of a 0.8% lift in GDP over the same period.

Looked at this way, this looks ... well, not good tidings. Still, were comparing dollar signs with percentages - apples with chestnuts (roasting on an open fire).

My attempt to crunch the numbers shows that with 2016 GDP of US$18,569,100,000, a 0.8% increase would take the economy up to US$18,717,652,800 in 10 years' time.

The current budget deficit - estimated to grow by US$1 trillion in 10 years - will grow from the current US$63,214,000,000 to US$64,214,000,000.

As a percentage of GDP, the budget deficit will be 3.4% in 2027 from 3.5% today (if all goes as predicted). Not much but still an improvement, 'ey?

Still, the question must be asked. Does America need this kind of fiscal largesse at this time in its economic cycle ... when almost all indicators are pointing to the sky?

That's so un-Keynesian. Just as Greece was required to tighten its fiscal expenditure when its economy was in recession (that sent it in direr straits), America is fiscally spending at a time when it doesn't need to.

More so, given that the US government (yet again) faces another government shutdown if it doesn't pass a spending bill ahead of the expiration of the current funding through to 8 December.

The immediate implication is that the Fed could raise interest rates more aggressively than expected. Recall that since Trump's victory, the Fed has treated Trump's promised reflationary policies as "upside risks".

This is one case when America could learn from Australia. It wasn't too long ago when Australia's budget (under Treasurer Peter Costello) was in surplus - it went as high as 2% of GDP in 2000 to 1.7% of GDP before the GFC hit - sparking speculations that Australia doesn't need a bond market anymore because Australia no longer needs to borrow money, thank you very much.

The surplus was spent on tax cuts instead of saved for a rainy day. Ten years later after the last surplus, the Australian government is still struggling to get the budget back into surplus.

This is also a testament to David Ricardo and his "Ricardian equivalence theorem", which in simple terms states that, a tax cut now would make no difference to aggregate demand because taxpayers will anticipate higher taxes in the future (or less welfare spending) to offset higher deficits.

Read more: AustraliaGDPTrumpFedDavid RicardoDeutsche BankFactsetGFCGreeceRussiaTreasurer Peter CostelloUS Senate
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