Sunday, 3 December 2017

Trump´s tax cuts mean ´we´ won´t beat global poverty

The US Senate’s approval on Saturday, 2nd December 2017, of big corporate tax cuts (from currently 35 to ca 20%) paves the way for a rehearsal of Reagonomics, in worse:
·         a ballooning US budget deficit (despite spending cuts for the American poor), according to the Congressional Budget Office and the Joint Tax Committee;
·         a further sugar high for stock markets and, possibly, short term growth;
·         a tighter US monetary policy to limit short-term diabetis (inflation pressures, bubbles);
·         rising US interest rates and a stronger US dollar;
·         depressing raw material prices in dollar-denominated markets.
Unlike Reagan, Trump is unashamedly protectionist, limiting any beneficial effects of the US tax cuts on US imports. Trade protectionism and the level of economic activity are important for developing countries, since they affect their exports and terms of trade. High real interest rates will dramatically increase the debt service burden of indebted developing countries; the appreciation of the US dollar will depressed commodity prices; developing-country terms of trade will mostly drop, implying an implicit income transfer away from commodity-dependent countries to commodity importers.

Table: Likely Impact of Trumps Tax Cuts on Africa
Net Foreign Assets/
Commodity Trade
High debt/tax ratio
Low debt/ tax ratio
Net FX reserves

The burden on the world´s poor will not be uniform. The table, inspired by van Wijnbergen´s (1985) analysis[1] provides a quick balance-sheet analysis of the impact of rising interest rates, a rising US dollar, and of falling commodity prices on some emerging countries. Ghana is an example of a country possibly worst hit by the US Tax cuts as it is a net oil exporter and carries a high net debt load. India and China should be much less affected in comparison by the US tax cuts as they are net importers of fossil energy and minerals, while they are less affected by a rise in interest rates. Whether they will benefit from any US expansion fueled by the tax cuts, is quite doubtful. First, it is quite unlikely that the US tax cuts will lead to a sustained; the Senate tax plan would merely cause faster economic growth -- about 0.8 percent more over the next decade, the Joint Committee on Taxation has found. Second, any important pass-through of US growth benefits abroad will be inhibited by Trump´s protectionism. With Trump, “we” can´t beat world poverty.

[1] Sweder van Wijnbergen (1985), “Interdependence Revisited: A Developing Countries Perspective on Macroeconomic Management and Trade Policy in the Industrial World”, Economic Policy, Vol. 1, No. 1 (Nov., 1985), pp. 82-137.

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