There is some good economic news but a lot more bad economic news for SA about another Donald Trump term in the White House. The good news is that another Trump presidency will keep gold prices very well bid. The bad news is the reason that gold will have the winds to its sails is because of America’s likely return to inflation and because of the likely global economic and financial market turbulence that Trump’s economic policies will cause. Such global economic instability is the last thing SA can afford with its very shaky public finances and its dependence on the kindness of strangers to finance its budget and balance of payments deficits.
On the campaign trail, Trump made promises in three broad policy areas that, if kept, are more than likely to be very destabilising for the US and world economies. He promised to make a slew of very large tax cuts, to resort in a major way to import tariffs, and to deport more than 10-million undocumented immigrants.
On the tax front, Trump promised to extend the 2017 Tax Cut and Jobs Act, reduce the corporate tax rate from 21% to 15%, and eliminate taxes on social security benefits. According to the Committee for a Responsible Budget, over the next decade those tax cuts would add a staggering $7.75-trillion to the national debt. With control of the Senate and likely control of the House of Congress, Trump should have little difficulty in securing passage of his tax cut proposals.
In evaluating the inflationary risks of Trump’s proposed tax cut programme, it is important to bear in mind the parlous state of the US’s public finances that he will be inheriting. According to the Congressional Budget Office, even before taking into account the proposed tax cuts, the US was likely to run budget deficits of about 6% of GDP, while by 2034 the public debt was expected to rise to 120% of GDP. That would be a worse public debt situation than what prevailed immediately after World War 2.
If Trump now implements his tax cut programme, by the end of the next decade the country’s debt-to-GDP ratio would rise to more than 140%. As is suggested by the recent rapid rise in the 10-year US treasury bond yield, this is already raising serious questions in the market about the sustainability of America’s public debt path. Both foreign and domestic bond holders are beginning to ask whether the US will not go the way of all too many other highly indebted countries and try to inflate itself out from under its debt burden. Needless to add, higher interest rates would further complicate the country’s precarious public finances and would create considerable strains for the banks in general and for the regional banks in particular.
Another consequence that might be expected from a reckless budget policy is that it will increase the US’s already wide external current account deficit. It will do so as it will erode the country’s already very low savings rate. That in turn could invite a dollar crisis and seriously undermine the dollar’s current status as the world’s dominant international reserve currency.
Another major plank of Trump’s economic programme that is very bad news for the global economy is his proposed resort to import tariffs on a large scale. He is doing so with a view to eliminating the trade deficit and bringing manufacturing jobs back home. Not only is he a proposing a 60% tariff on all goods imported from China. He is also proposing a 10%-20% tariff on imports from all of America’s other trade partners.
It is difficult to overstate the damage that such tariffs would do to the global economy. China and Germany, the world’s second- and third-largest economies, are already experiencing serious economic difficulties and are in no position to take a big hit to their all-important export industries. There is also the real danger that these countries will retaliate with increased tariffs of their own on US imports. That in turn could take us down the road to the economically destructive beggar-thy-neighbour policies of the 1930s.
Yet another way in which the Trump economic programme
could add to US inflation and slow its economic recovery is his proposal to deport more than 10-million undocumented immigrants. This must be expected to drive up food prices and
to cause disruptions in those industries dependent on these workers.
All of this is likely to create a less hospitable international economic environment for SA’s exports and a more demanding market for SA debt. SA policymakers would do well to anticipate a changed international and economic market environment and lose no time in getting the country’s public finances on a sounder footing than they presently find themselves.
• Lachman, a former deputy director in the IMF’s policy development & review department and chief emerging market economic strategist at Salomon Smith Barney, is a senior fellow at the American Enterprise Institute.
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