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Economic impact of the US elections
The main candidates in the US presidential elections present different economic proposals. Donald Trump and Kamala Harris have different approaches in areas such as taxes, international trade, housing and social benefits. As far as taxes are concerned, Trump wants to maintain and expand the 2017 tax cuts (Tax Cuts and Jobs Act), with new reductions for companies, setting rates between 15% and 20%. Meanwhile, Harris advocates tax increases for Americans with income from work and capital of more than 400,000 dollars, as well as an increase in taxes on capital gains of more than one million dollars. The Democratic candidate's plan aims to fund social and infrastructure programs. In international trade, Trump proposes increasing tariffs, including a general tariff of 10% on imports and up to 60% for Chinese products. This strategy could increase the prices of consumer goods. Harris plans no new tariffs, focusing on balanced trade negotiations to maintain competitiveness without putting pressure on inflation. As for housing, Harris wants to limit revenue increases and encourage the construction of affordable housing, while Trump shuns price controls, preferring to promote tax credits for the housing sector. Both candidates support strengthening the child tax credit, but with different proposals. Harris suggests up to 6,000 dollars a year for newborns, while Trump advocates a one-off credit of 5,000 dollars per child. While these measures could reduce child poverty, they pose challenges for balancing the budget and could worsen the deficit, especially in the long term. In short, Harris focuses more on raising taxes on higher incomes to support social programs, while Trump focuses more on reducing taxes and strengthening customs tariffs to promote domestic growth, despite the risk of a possible increase in inflation.
As for the financial markets and monetary system, a government that has a constructive relationship with the US Federal Reserve, respecting its independence, contributes to keeping inflation under control, avoiding financial bubbles in the markets, which is fundamental for sustainable economic growth in the medium and long term. The best economic outlook generally occurs when the winning candidate manages to balance responsible fiscal policies (reducing the public deficit and promoting investment in infrastructure and technological innovation) with trade policies that open up to foreign markets. Globalization is more conducive to economic growth, but it is also deflationary.
The US faces negative budget balances of over 6% of GDP and a public debt of 122% of nominal GDP. Current nominal growth of 5.5% can absorb much of this year's 2024 deficit of 6.3%, although it is unusual to see such high negative balances in periods of economic expansion. High deficits are expected to continue, regardless of which party wins, driven by the costs associated with an ageing population, especially in healthcare, and the increase in debt servicing (interest). In addition, a possible economic slowdown, or even a recession, would further aggravate the negative budget balance, probably above 10%, with lower revenues and higher expenses resulting from the automatic stabilizers.
According to the Congressional Budget Office, the public debt held by the public, 28.5 trillion dollars, could rise from 99.5% to 125% of GDP by 2035. In a scenario of divided power, where the White House is controlled by one party and Congress by another, the debt is likely to rise above 125%, but if one party dominates both branches, the increase will be more pronounced. The Committee for a Responsible Federal Budget estimates that if Harris implements her promises, the debt could reach 133% of GDP by 2035, while with Trump, the debt could reach 142%, given the reduction in tax revenues. In 2024, interest expenditure was 1.16 trillion dollars (882 billion net), only surpassed by health and social security. As long as nominal GDP growth is higher than long-term interest rates, the risk remains under control. In fiscal year 2024, the average interest rate on US public debt was 3.32%, lower than the nominal GDP growth of 6.6% in 2023. Control of the fiscal deficit and inflation, innovation and technological competitiveness, and improvements in the education and health sectors are essential for a globally robust and competitive economy in the long term. An American administration that promotes trade stability and energy security will benefit Europe, while protectionist policies tend to hamper transatlantic trade and penalize European economic growth.
PAULO MONTEIRO ROSA
Senior Economist at Banco Carregosa