U.S. and global economic growth would be boosted by increases in spending and tax cuts promised by President-elect Donald Trump, but those gains would be lost if he pressed ahead with threatened tariff increases that triggered retaliation, the Organization for Economic Cooperation and Development said Monday.
During his campaign, Mr. Trump pledged to boost infrastructure spending by as much as $1 trillion, although the details of how that would be financed are sketchy. He has also promised to cut corporate and personal income taxes.
In its twice-yearly report on global economic prospects, the Paris-based research body said that while the exact form it would take is uncertain, it does expect Mr. Trump to offer some fiscal stimulus from the earlymonths of his presidency, and that its likely scale that would boost U.S. economic growth to 2.3% from 1.9% in 2017, and to 3% from 2.2% in 2018. There would also be benefits for other parts of the world as U.S. demand for imports rises, with global economic growth raised to 3.3% from 3.2% in 2017, and to 3.6% from 3.3% in 2018. The OECD is the first international economic policy agency to publish an estimate of the likely impact of Mr. Trump's proposals.
"The extent to which the fiscal program set out by the new administration during the election campaign is implemented will not become clear for some time, as agreement by Congress will be required to introduce necessary legislation and in some areas, notably tax reform, complex legislative changes may be needed," it said. "Nonetheless, it seems likely that there will be some easing of fiscal policy over the next two years, with implications for growth prospects and inflation in the United States and other economies."
The OECD's forecasts are based on an increase in government spending in 2017 and 2018 of 0.25% of gross domestic product, a cut in income taxes that reduces government revenue by 0.5% of GDP in each year, and a cut in the corporate tax rate that reduces revenue by 0.75% of GDP in 2018. It calculates that thanks to the boost to growth, such a package would leave the government's debts slightly smaller as a share of economic output.
The OECD, which gives policy advice to its 35 members, said other governments should also provide more fiscal stimulus than now planned, since that would further boost global growth. With the room for monetary policy initiatives that boost growth having been "exhausted," the OECD has in recent years urged more investment spending by governments as a way out of what it calls the "low-growth trap."
But it warned that a slide toward protectionism could offset the boost from higher government spending and lower taxes.
In addition to his pledges on spending and taxation, Mr. Trump said he would introduce higher tariffs on imports from China and Mexico, and reassess other trade relationships that he said placed U.S. workers at a disadvantage.
"Protectionism and inevitable trade retaliation would offset much of the effects of the fiscal initiatives on domestic and global growth, raise prices, harm living standards, and leave countries in a worsened fiscal position," said Catherine Mann, the OECD's chief economist. "Trade protectionism shelters some jobs, but worsens prospects and lowers well-being for many others. In many OECD countries, more than 25% of jobs depend on foreign demand."
Turning to the U.K., the OECD raised its growth forecast for 2017 to 1.2% from 1% in September, but said it expects the economy to slow further in 2018 to grow by just 1% as uncertainty about the terms of the country's departure from the European Union weakens business investment. Its forecasts are lower than those of the U.K.'s Office for Budget Responsibility, which last week said it expects the economy to grow by 1.4% next year and 1.7% in 2018.
In a budget update Wednesday, U.K. Treasury chief Philip Hammond signaled a new course after almost a decade of belt-tightening, saying he expects billions in extra borrowing over the next few years to support the economy as it exits the EU.
"The latest government plans...indicate a slower pace of fiscal consolidation and some increase in public investment," the OECD said. "A more significant increase in public investment would support demand in the near term and boost supply in the longer term."
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(END) Dow Jones Newswires
November 28, 2016 05:35 ET (10:35 GMT)
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