As the candidates clash over their economic plans, the deficit, currently estimated at around 6 to 7 percent of GDP, has occupied the minds of economists as the two candidates present their contrasting economic policies.
President Donald Trump’s fiscal strategy, which includes extending the Tax Cuts and Jobs Act of 2017, is expected to potentially increase the US deficit by $4.1 trillion, according to estimates. Penn Wharton Budget Model.
His strategy focuses on cutting corporate taxes and easing regulations, a formula designed to spur business growth and restore market confidence. But experts, including recently 23 Nobel laureates, warn that these tactics could fuel inflation and worsen the deficit crisis.
On the other side, Vice President Kamala Harris is advocating for higher taxes on the wealthy and corporations to finance social initiatives. This approach could add some $2 trillion to the deficit, according to declared a nonpartisan, research-based initiative.
But while Harris’s proposals aim to create a more equitable tax landscape, analysts are skeptical about her ability to pass these plans through Congress, particularly in the event Democrats fail to secure a majority in the Senate.
In a recent episode of Relative Return Unplugged, Shane Oliver highlighted the seriousness of the situation.
“If we look back over the past 30 years, we generally see that Republican administrations blow up the budget deficit and Democrats then bring it back under control. You think Reagan, Bush, then the deficit improved under Clinton, then Bush two followed by Obama. To some extent, however, Democrats generally benefit from the tax cuts and invigorating policies implemented by Republicans. But this time it didn’t happen,” he said.
“We should have seen a much greater improvement in the budget deficit. It should not be 6 or 7 percent of GDP. And I think Biden made mistakes. And one of his biggest was one of the first things he did was a stimulus package of about $2 trillion in early February 2021. The economy was already recovering and they were injecting everything this money.
As the election approaches, Oliver believes the deficit will increase regardless of who wins.
“Trump’s policies will likely add 3 percentage points to the budget deficit. Kamala Harris’ policies, maybe 1 or 2 percent, but obviously Trump is probably more threatening to the deficit, but obviously a lot depends on what they can get through Congress,” he said.
“But obviously it could have a big impact.” And I think the markets are starting to worry about that to some extent. The huge budget deficit is feared to get worse if Trump wins, and that’s why you’re seeing this rise in bond yields, or part of the reason you’re seeing this rise in bond yields that we’ve been seeing for two years. of weeks. »
He also highlighted the potential implications for interest rates, noting that a substantial increase in the deficit could push rates higher, affecting investment and consumer spending. Ultimately, Oliver emphasized that the need for a credible plan to reduce the deficit is more crucial than ever.
To hear more from Shane Oliver, tune into our podcast here.
