Tax cuts seen giving modest boost to US economy as recession looms

NYC Mayor Bill de Blasio joins demonstrators as they take part in a protest against government's tax reforms, on Dec 2. PHOTO: REUTERS

WASHINGTON (BLOOMBERG) - Fiscal stimulus, including large Republican-backed tax cuts, will deliver a modest boost to the US economy in the next two years, although many economists also expect a recession to start during that time, according to a new survey.

About half of economists say fiscal policy changes will augment US growth by 0.2 to 0.39 percentage point in 2018, according to a survey of 51 forecasters by the National Association for Business Economics conducted on Nov 6-15. About one-fifth project a bigger gain and another fifth see no benefit to growth.

Since the survey was conducted, the Republican tax proposal has undergone numerous changes that could alter its impact on the economy, with the potential for further modifications during Senate and House negotiations before it heads for President Donald Trump's signature.

Even with the bump, a slight majority anticipates a recession beginning sometime before the end of 2019, with most of that group seeing a business-cycle peak in the second half of that year. That compares with 48 per cent who see the expansion running through at least 2020. Economists were most likely to cite trade protectionism as a top risk to expansion, followed by a substantial stock-market decline and higher interest rates.

The effects on the economy from the tax plan, pushed by the Trump administration and congressional Republicans, has been a contentious topic. Republicans have said that the additional growth unleashed by the legislation means the cuts pay for themselves by increasing revenues; many economists disagree. The White House says the package will trigger an investment boom by companies that will lift growth to a sustained 3 per cent pace and make up for the loss of tax revenue from lower rates.

At the time of the survey in early November, 76 per cent of economists expected tax cuts to be enacted during the first half of 2018. They were less optimistic on the prospects of an infrastructure-spending program from the Trump administration, with just 35 per cent expecting one to get done in 2018 and 37 per cent saying it won't happen during the current presidential term. For 2019, 44 per cent see a bump to growth of 0.2 to 0.39 percentage point, but roughly the same proportion expects a smaller boost or none at all.

In another question, most economists said the renegotiation of the North American Free Trade Agreement will have either a marginal effect or no impact on the US economy. Twenty-five per cent expect the results of the talks to be marginally positive, while an equal proportion expect it to be marginally negative and 19 per cent predict zero net benefit.

Trump has threatened to pull out of the 23-year-old accord if Mexico and Canada don't bow to US demands.

Economists were split on the reasons US wage growth has remained weak even as the job market tightens. About 30 per cent blamed poor productivity growth, while 27 per cent pointed to low inflation and 19 per cent cited an aging population.

Follow ST on LinkedIn and stay updated on the latest career news, insights and more.