As candidates clash over their economic blueprints, the deficit, currently estimated at approximately 6–7 per cent 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 projected to potentially increase the US deficit by US$4.1 trillion, according to Penn Wharton Budget Model.
His strategy focuses on slashing corporate taxes and easing regulations, a formula designed to ignite business growth and restore market confidence. But experts, including most recently 23 Nobel prize winners, warn these tactics may stoke inflation and deepen the deficit crisis.
In the opposite corner, Vice President Kamala Harris is advocating for higher taxes on the wealthy and corporations to fund social initiatives. This approach could add some US$2 trillion to the deficit, the non-partisan, research-based initiative said.
But while Harris’ proposals aim to create a fairer tax landscape, analysts are sceptical about her ability to push these plans through Congress, particularly in the event the Democrats don’t secure a majority in the Senate.
On a recent episode of Relative Return Unplugged, Shane Oliver underscored the seriousness of the situation.
“If you go back through history over the last 30 years, it’s typically the case that the Republican administrations blow out the budget deficit and the Democrats then get it back under control. You think Reagan, Bush, and then the deficit improved under Clinton, and then Bush two was followed by Obama. To some degree, though, the Democrats usually get the benefit of the tax cuts and the invigorating policies that the Republicans put through. But this time around, that hasn’t happened,” he said.
“We should have seen a much bigger improvement in the budget deficit. It should not be 6 or 7 per cent of GDP. And I think Biden made some mistakes. And one of his big ones was that one of the first things he did was something like a US$2 trillion stimulus package back at the start of February 2021. The economy was already recovering, and they pump all this money.”
As the election approaches, Oliver believes there will be an uptick in the deficit regardless of who wins.
“Trump’s policies will probably add potentially 3 percentage points to the budget deficit. Kamala Harris’ policies, maybe 1 or 2 per cent, 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 that could obviously have a big impact. And I think markets are starting to worry about that to some degree. Huge budget deficit worries that it could get worse if Trump wins, and that’s why you’re seeing this backup in bond yields, or part of the reason you’re seeing this backup in bond yields that we’ve been seeing for the last couple of weeks.”
He also pointed out the potential fallout on interest rates, noting that a substantial increase in the deficit could push rates higher, affecting investment and consumer spending. Ultimately, Oliver stressed that the need for a credible plan to address the deficit is more critical than ever.
To hear more from Shane Oliver, tune into our podcast here.
