Who knows what will happen to Donald Trump’s promises to get rid of illegal immigrants or build a wall with Mexico, or to many of his other more zany campaign-trail pronouncements. But if his presidency is to have credibility, he will move quickly on at least some of the key points of his economic agenda.
There will be endless speculation about what will happen and when, but this much is clear: US taxes are coming down, a bag of money will be spent on infrastructure, and there are bound to be a few clear signals early on in the administration of a new approach to trade policy. In other words,this will all get real pretty quickly.
Consider the politics of it. The Republican-dominated Congress is hardly going to stand in the way of some significant moves on tax. It may quibble about the detail, there may be debate about what it will all mean for the US national finances, but it will happen: personal and corporate taxes will fall.
Then there is trade. Trump, as president, will have significant powers that he can exercise himself in this area, without going near Congress. Just as on tax, he has to do something dramatic on trade early in his term.
There is a view around that Trump will be reined in by the reality of being in office, facing budget constraints, having teams of advisers warning him about the reality of policy changes and getting snared in the seemingly inevitable stasis of the American political system. Perhaps much of this will happen. But the American people have voted overwhelmingly for his programme, and congressional Republicans will surely have to recognise this.
Incomplete and incoherent
Trump’s economic programme has been criticised for being incomplete and incoherent, and much of it is. But there is a philosophy behind it, one that calls not for incremental steps but for dramatic change. Trump wants to roll the dice, slash taxes, spend loads of money and hope that faster economic growth will pay for everything. The whole point of his strategy is to provide a big boost to growth by major change. He will not settle for small steps.
A paper written before the election by a senior Trump economic adviser, Stephen Moore, outlines the thinking. Moore was in the headlines during the week, talking about a "flood" of companies being attracted back from Ireland to the US after the corporation tax rate is slashed. His short paper, titled Trump Will Ignite an American Economic Boom, shows what this is about.
Growth in the years since the financial crash has been anaemic, Moore points out, averaging just 2 per cent a year, recently slowing to 1.5 per cent. This is a key reason why voters are looking for something new: the recovery just hasn’t delivered what they expected.
Moore argues that Trump’s policies could more than double the annual growth rate to 4 per cent over the next five years, “the equivalent of adding another Texas to the US economy”. Central to this is the massive tax-cutting programme, “the biggest pro-growth tax cut since Ronald Reagan’s 1981 reform”, involving major cuts in personal and corporate taxes.
Those of you old enough will remember a Fianna Fáil government in the early 1990s talking about “ self-financing tax cuts”. The theory is that the reductions give such a boost to economic activity that tax cuts pay for themselves. It never worked very well in Ireland. Arguably, it might have a better chance in a big, more closed, economy such as the US. But even the experience of the Reagan years suggests that tax cuts, sooner or later, have to be paid for.
Congress may have pause for thought when it comes to look at the numbers. Most economic analysts don’t think it adds up, and say that if the policies are followed through, deficit and debt levels will rise sharply. Maybe the markets will take fright – already, US bond interest rates are rising sharply, anticipating higher inflation.
Likely move
However, all this means that the corporation tax rate cut is one of the more likely moves to happen. It is the move that Trump advisers argue will attract US investment back “home” and stop more companies moving overseas, thereby boosting growth, jobs and tax revenues elsewhere. Moore said on radio this week that this part of the plan was the “single most important thing for our country right now”.
All this is pointing in one direction. Lower US corporation taxes and other changes to attract corporate profits back to the US are on the way.
Interestingly, Moore says that he doesn’t always agree with Trump on trade. Moore favours free trade, but says that “taking a tougher stance here might be necessary to restore dwindling support for open markets”. This suggests that Trump might be getting advice to talk tough but draw back from aggressive protectionist policies. We will see.
None of this means that big US companies are going to flood out of Ireland. However, a few who came here in purely tax-driven deals in recent years – so-called inversions – might go. And there is no doubt that attracting future investment will be tougher if US corporation tax is slashed.
All the signs are that the cut in corporation tax from its current level of 35 per cent – maybe not all the way to the Trump target of 15 per cent, but somewhere close to it – is on the way. Trump knows that if he is to win the battle to keep US jobs at home, money will talk. And he needs an early win.