Economists call U.S. fiscal policy ‘too stimulative’

Major tax reforms approved by the US Senate

The latest round of tax cuts may have please members of the general public in the U.S., but it turns out economists aren’t impressed with many claiming that the cuts could cause the budget deficit to surge.

According to results of a semi-annual survey by the National Association for Business Economics, many economists believe that the latest fiscal policy in the U.S. is ‘too stimulative’ and in the long run it would pave way for swelling budget deficits.

As many as 52 per cent of NABE members said that the fiscal policy was ‘too stimulative’ and 61 per cent believe the U.S. budget deficit would surge because of the tax cuts. The result was a pronounced shift from six months ago, when survey respondents said fiscal policies were “about right.”

Two thirds of NABE members viewed changes to the US corporate tax regime, which saw the top tax rate for businesses fall to 21 percent from 35 percent, as “far better” or “somewhat better.” But about half said changes to individual tax rates as “worse than before.”

The unanimous outlook for the short-term may be on a positive end, but over the long term, things aren’t looking too optimistic. Virtually all NABE survey respondents believed the tax cuts would boost growth by 0.25 to 0.49 percentage points next year.

Defense outlays have been significantly increased with White House deficit forecasts now surpass even those of the Congressional Budget Office.

With an estimated $666 billion deficit last year, or 3.5 percent of GDP, the budget gap should swell to nearly a $1 trillion, or 4.7 percent of GDP, by next year because of the tax cuts.

Meanwhile, survey respondents voiced support for the Federal Reserve’s current policy of steadily hiking interest rates to head off an anticipated rise in inflation, with 64 percent saying the strategy was “about right.”

A sizeable majority, or 59 percent, believed economic policy should do more to mitigate climate change, while 36 percent said economic policy should not be used toward this end.

Nearly 80 percent, however, said economic policy should do more to combat income inequality.

Within this group, 56 percent believed education for low-skilled workers would be the most effective policy, while about a quarter said a more progressive federal income tax system was the best tool.


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