Still a long road to US tax overhaul

The Senate budget resolution this week was a positive step, but we remain cautious about the scope of any tax cuts eventually enacted.

The US Senate this week approved a budget resolution, which effectively allows it to side-step Democrats’ opposition to start formulating tax cuts. The bottom line is that the Senate vote increases the odds of some tax cuts actually happening, but we think that the road to the finish line will be bumpy and that any tax cuts, if enacted, could be modest. There is still a high risk that legislation is derailed along the way: much will depend on the details of the proposed tax cuts, which still have to be unveiled (probably in early November).

There is plenty of room for disappointment, which is why we remain cautious. The Trump White House has shown a tendency to take its eye off the ball on a number of issues this year. Further distraction could dent Congress’s enthusiasm for fiscal reform. There is also the risk that the tax debate becomes polluted by side issues.

Resistance within the Republican Party could rise, especially if there are not sufficient revenue raisers to compensate. This debate comes at a time of federal budget fragility, potentially scaring some Republican backbenchers. The federal deficit stood at 3.7% of GDP in Q2 2017. By contrast, there was a budget surplus as high as 2.4% of GDP in 2000, just before tax cuts introduced by President George W. Bush.

Our stance therefore remains cautious for now. We await more details on the proposed tax cuts, their scope and their magnitude. If tax cuts do pass, we think they would add a modest upside risk to our growth forecast, and would raise the chance of an additional Fed rate hike in 2018. The extent of the boost to our growth forecast will depend on the magnitude of tax cuts, which remains uncertain.

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