In the Pre-election Economic and Fiscal Outlook released on 20 May 2016, the secretaries of the Departments of the Treasury and Finance warned that a significant economic shock would see Australia’s fiscal position rapidly deteriorate. Could that shock come from the election of Donald Trump, Bernie Sanders or Hillary Clinton?
With Donald Trump clinching the Republican nomination, there is renewed interest in the implications of his policies on the US and global economies. And to say that there is concern is an understatement. Former Secretary to the US Treasury, Larry Summers, observed that:‘The possible election of 'Demagogue Donald' dwarfs congressional dysfunction as a threat to American prosperity’. There have been numerous articles with headlines such as ‘Donald Trump Economic Plans would Destroy the US Economy’ and ‘Donald Trump Announces Debt Plan that Would Collapse Entire Global Economy’. The Economist Intelligence Unit warned that a Donald Trump presidency ‘could be as damaging to the global economy as terrorism’.
The Trump economic policies causing concern include:
1. A threat to default on US debt in event of a recession. Trump said ‘I would borrow knowing that if the economy crashed, you could make a deal’. Analysts have warned this would create an international financial crisis.
2. The deportation of 11 million undocumented people. The American Action Forum, a pro-business think tank, estimates that the sudden subtraction of seven million workers would cause an immediate shock to thousands of businesses and shrink the US economy by about 2%.
3. Cutting personal income taxes, including lowering the top marginal tax rate to 25%, and reducing the corporate tax rate from 35% to 15%. It is estimated that this would cost federal revenue almost $10 trillion in the next decade. Trump has not indicated how such a plan will be financed and has no plans to cut spending. The US deficit would balloon.
4. The introduction of a 45% tariff on imports from China, a 35% tariff on imports from Mexico, and the repudiation of trade deals, including the Trans Pacific Partnership (TPP). Moody’s Analytics modelled the consequences of these plans and concluded that they would risk a recession in China and Mexico and the fallout would also drag the US into recession. The damage would be magnified if China and Mexico retaliated and imposed tariffs on US goods.
It is not just Trump’s announced economic policies that are causing concern. It is also the overall incoherence of his approach to policy and resulting uncertainty. As Larry Summers noted ‘Donald Trump would for the first time make political risk of the kind usually discussed in the context of Argentina or Russia relevant to the US’.
Lesser attention has been given to the economic consequences of Bernie Sanders becoming president because the expectation is that Hillary Clinton will get the Democratic nomination. But the policies being advocated by Sanders would also raise major concerns for the US and global economies. Sanders policies include; the introduction of free health care; substantial increases in welfare and infrastructure spending; the break-up of the major banks; a significant increase in the minimum wage; the introduction of a financial transactions tax: and the ending of trade deals including NAFTA, TPP, the US-Korea Free Trade Agreement, and the Permanent Normal Trade Relations with China The implementation of Sanders' policy platform would see a dramatic increase in federal spending. The price tag is estimated at $18 trillion over the next decade. To stop a blowout in US public debt, a major increase in US taxes would be required.
The saving grace may be that if Trump or Sanders were elected, they would not implement all their announced policies. Perhaps reality would set in and they would abandon their more extreme plans. They could also have problems getting legislation through Congress. Nevertheless, both Trump and Sanders could potentially do a considerable amount of harm though the use of the President’s executive powers.
This leaves Hillary Clinton. Her economic policies have not been nearly as extreme as Trump or Sanders, although pressure from Sanders has pushed her to the far left and to repudiate many of her previous positions. Clinton no longer supports trade liberalisation, has lambasted the banks to demonstrate that she would not cave into the institutions who hosted her very well paid speeches, and now supports a high-tax, high-regulatory platform that is very different to her previous views. A Clinton administration may not raise the same concerns for the global economy as a Trump or Sanders victory, but there still would be many risks. Among those is the failure of the US to provide the leadership needed to deal with pressing global economic problems.
The outcome of the US presidential elections could pose a major risk to the global economy and in turn, the Australian economy. It is one of many external risks that Australia faces, but it highlights that those risks are very real.
The concern is that the economic debate in the Australian election is based on the premise that we will continue to face a benign international economic environment that will provide us the luxury to very gradually strengthen our fiscal position at some time in the future. But as John Lennon said ‘life is what happens to you while you’re busy making other plans’. If ‘life’ includes the election of President Trump, or President Sanders, Australia has little policy flexibility to deal with the economic shocks that could eventuate.
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