US: Will Trump’s spending plans give the much promised big boost to GDP? - Westpac

Richard Franulovich, Research Analyst at Westpac, suggests that whether or not Trump’s spending plans give the much promised big boost to US GDP depends on the split between tax cuts and infrastructure.

Key Quotes

“The latter has a much higher “fiscal multiplier” compared to tax cuts, which can be saved (see over). Trump’s tax, defence and infrastructure proposals are estimated at $536bn pa. Taking the CBO’s multipliers and applying them to his spending plans translates into a $309bn boost to annual GDP. That is huge. The high multiplier associated with infrastructure means $55bn pa in spending here adds $72bn pa to GDP while corporate tax cuts are ineffective, costing $194bn pa they deliver just $39bn in GDP.”

“But the risk that markets have run too hard with reflation. The much discussed $1trn infrastructure plan is a smaller $550bn according to his transition website, relies heavily on unrealistic assumptions about private sector involvement via tax credits and in any case is not considered a priority among fiscal conservatives. Trump’s defence plans are not considered realistic either, many noting that private sector contractors simply do not have the capacity to deliver on Trump’s military spending plans. In short, there are real constraints to those very parts of Trump’s plans that have the highest fiscal multipliers and the biggest impact on growth.”