Donald Trump’s return as president is a historic victory. He is only the second president after Grover Cleveland to have served non-consecutive term.
Trump’s victory signals an upcoming shift in US policy. His administration is aiming for tax cuts, immigration restrictions and sweeping trade duties.
The economic and market impact of his agenda will depend on the speedy approval of his policies by Congress.
Investors are watching Trump’s proposed economic interventions closely as he enters his second term.
While Trump intends to revisit his signature policies, the impact of those policies may be different this time.
The economic landscape has changed since the COVID-19 epidemic, which triggered an inflation surge that may not yet be under control.
It is also unclear how far he will go to fulfill his election promises.
If his administration repeats his election rhetoric, however, the policies could carry substantial economic risks, especially for the national debt. This would have far-reaching implications on growth and market stability.
Addressing debt ceiling tops immediate priorities
Both parties have contributed to the national debt’s significant increase since Trump assumed office in January 2017.
Trump’s first big challenge as president will be to manage the US federal debt ceiling, which is set to reset in January.
Treasury Secretary Janet Yellen will deploy “extraordinary” measures to keep the government operating, but Trump’s Administration will face a deadline to negotiate budget changes and raise the debt limit.
Analysts expect his fiscal plan to be more successful with the Republican control of both Senate and House.
If Democrats win the House, Trump’s tax-cutting agenda, and other policies, may be challenged.
Domestic agenda: tax reductions and tighter immigration laws
Trump’s focus will likely be on domestic policies, echoing his “America First” platform from his first term.
His main goals are to extend the 2017 Tax Cuts and Jobs Act, which is set to expire in 2020. He also wants to reduce corporate tax rates and exempt tips from taxation.
A Republican majority would make it easier to pass these measures. However, a Democratic-led House might delay or modify them, especially in the case of corporate tax cuts.
Immigration is expected to also be a priority. Trump’s plans include tightening immigration law, crackingdown on illegal immigration and limiting legal immigration.
Analysts at ING Think say that reduced immigration and tariffs could be a challenge to the US economy on a medium-to-long term basis.
Immigrant workers now account for 19.5% of the US workforce.
If immigration is curtailed then sectors like agriculture could face severe labor shortages. This would drive up wages and fuel inflation.
These policies, while aimed at increasing job opportunities for American citizens could have long-term effects on the labor market. This is especially true in industries that rely on immigrant workers, such as agriculture.
Phase two: tariffs on China, other global imports
Trump is expected to focus on trade policies once domestic issues are resolved.
His administration plans to impose aggressive duties, with a 60% tariff on Chinese products and 10-20% on imports from foreign countries.
This protectionist approach aims at encouraging American production and reducing reliance on imported goods.
ING Think stated that the introduction of these tariffs in phases, by the end of 2025 or the beginning of 2026, reflects a risk of economic disruption.
China would be likely to face tariffs first. Other nations would then follow in a staggered release.
Tariffs may benefit US manufacturers by reducing foreign competition but they also increase the price for consumers.
Tariffs on products such as washing machines have led to significant increases in consumer prices, according to historical data.
If tariffs were extended widely, inflation and consumer spending would likely increase, which could have a negative impact on the economy.
Trump’s goal to create jobs through protectionist measures could be complicated by retaliatory duties from affected countries.
Near-term growth, but long-term challenges
Investors and high-income families are expected to be encouraged by Trump’s probusiness policies, especially his tax cuts and reduced regulations.
With less tax pressure on high-income earners, they are likely to continue strong consumer spending that has been a major growth driver.
As regulatory uncertainty subsides, companies may also start investing again, potentially increasing capital expenditures.
Tariffs on imports are likely to increase prices for consumers, and costs for US manufacturers who depend on foreign components.
Trump’s fiscal policy also threatens to increase the national credit debt significantly.
The bipartisan Committee for a Responsible Federal Budget estimated that his proposals could increase the debt by $7.75 trillion over the next decade.
This fiscal expansion may force the Federal Reserve to increase interest rates. This could offset the growth benefits of the tax cuts, and increase borrowing costs for consumers and businesses.
A report by Barron’s Notes
Many close to Trump point to the 2016 adage “take him seriously, but not literally.”
The report cites people close to him as saying that he wants a strong economy, and a positive legacy. He would change course if an aggressive tariff agenda threatened American prosperity.
Analysts believe that, while the outlook for growth in the short-term appears positive, as Trump’s fiscal and immigration policies become more aggressive, the longer-term challenges to the US economy will increase.
The post US Elections 2024: How Trump’s tax cuts, immigration regulations, and tariffs can shape the American Economy may be modified as new developments unfold.
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