A crucial step towards US tax cuts

Approval of the Senate tax bill paves the way for a final congressional bill that leads to tax cuts. Although unchanged, we now see some upside risks to our 2018-19 scenario for US growth and inflation.

With the approval of the Senate tax bill in the early hours of Saturday 2 December, a key step has been taken toward tax cuts. The next chapter in the process is to reconcile this tax bill with the House of Representatives’ version, most likely in a ‘conference committee’.

We are leaving our 2018 US GDP growth forecast of 2.0% unchanged, but we now see risks to the upside. The upside could be more marked for 2019 if corporate tax cuts only kick in then, mitigating recession risks and lengthening the US business cycle. We will fine tune our forecasts depending on the final text that emerges from the conference committee. Our Fed scenario is also unchanged (three rate hikes between now and next June), but we see risks to the upside in this area too.

Various lobbies have been taken by surprise by the speed with which tax legislation has moved forward in the past few days, and members of Congress will want to maintain the momentum, hoping to have a final bill enacted into law before year’s end.

The Senate text still looks the closest to the final version of tax legislation. It is probable that the corporate tax rate will be cut in one go, but not before 2019, in contrast to our earlier view that the tax rate would be cut progressively over several years starting in 2018. The two tax bills propose a drop to 20% in the headline rate, but the White House has said that there is still room for a smaller cut, possibly to 22%.

The swiftness with which legislation got through the Senate is a sign of Republicans’ anxiousness not to appear empty handed before voters before mid-term elections in November 2018. The Senate vote increases the chances that tax legislation will eventually see the light of day. A number of steps still need to be monitored, particularly the conference committee’s text that merges the House and Senate bills.

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