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Citi's Willem Buiter: US GDP to Grow 2.7 Percent in 2018  

Citi's Willem Buiter: US GDP to Grow 2.7 Percent in 2018  

Wednesday, 06 December 2017 08:58 AM

Willem H Buiter, Global Chief Economist at Citi, predicts a small bump in economic growth in the first year of President Donald Trump’s sweeping tax-form blueprint, but it will fall short of the lofty goals some have touted.

Buiter told CNBC-TV18 that the deficit effect of tax plan will be negative for the economy. However, tax cuts will lead to fiscal expansion.

Investors have been digesting the U.S. Senate’s approval on Saturday of the biggest tax law change since the 1980s, taking Trump closer to his goal of slashing taxes on businesses.

The Republicans’ tax plan is expected to add $1.4 trillion over 10 years to the $20 trillion national debt to finance changes that they say would further boost an already growing economy, Reuters explained.

“We are expecting growth for the whole of 2018 at 2.7 percent as opposed to 2.3 percent for the whole of this year,” Moneycontrol.com quoted him as telling CNBC.

“So there will be some positive effect on US growth cyclical stimulus through this fiscal expansion. But nothing to raise in a material way; US potential output growth in the medium-term. If we get 1 percent a year extra, that would be generous,” he said.

Buiter also saw a mixed bag of potential economic benefits.

“There will be some strengthening of the dollar because the fiscal stimulus and resulting deficits. But this repatriation of so-called stranded US profits back to the US at whatever the rate that they are going to be paying, most of that money is already in US dollar denominated account and certainly not in emerging markets and quite a bit of it is already in the US in all likelihood. They are simply not held by entities that are subject to current US taxes. So this is second order phenomenon,” he said.

He expects $1 trillion of extra debt added to the US due to tax cuts.

“The deficit effects are going to be economic negatives. It will, in the short run, strengthen the dollar and drive up long-term interest rates as more treasury debt is issued to fund the deficit. Against that of course, we may get some positive effect on capital formation investment from the corporate tax cut. But since the US already has or is close to full expensing of capital expenditure, investment spending can be under the new proposals, deducted in full from the corporate tax bill. A cut in the corporate tax rate actually has no effect at all on capital formation. So the positive effects on potential output from these tax reforms are likely to be minor at best.”

For his part, Trump has said that the United States should be able to boost gross domestic product growth far beyond its current levels over time.

“I really believe it,” Trump said in an interview with Fox News earlier this year. “We’re saying 3 (percent) but I say 4 over the next few years. And I say there’s no reason we shouldn’t be able to get at some point into the future to 5 and above.”

Last year the U.S. economy grew 1.6 percent, it’s worst performance since 2011.

Meanwhile, Goldman Sachs predicts the tax-cut legislation will boost economic growth by around 0.3 percentage point for next year and 2019, Bloomberg reported.

With the Senate passing legislation on Saturday that matched the House of Representatives in including up to $10,000 in state and local property-tax deductions, that eliminated "the most important political difference between the bills before the conference negotiations start," Goldman economists led by Jan Hatzius in New York wrote in a note.

"We expect the final structure of the bill to reflect more of the Senate bill than the House bill, including a 20 percent corporate tax rate effective in 2019," the Goldman analysts wrote. While that’s down from 35 percent today, considering the expected package more broadly, the effective corporate tax rate will come down by "only a couple of percentage points," Goldman said.

The median estimate of economists surveyed by Bloomberg is for the U.S. economy to expand 2.5 percent next year and 2.1 percent in 2019, after 2.2 percent growth in 2017.

White House economic adviser Kevin Hassett recently said that he expects the pace of U.S. economic expansion to remain in the range of a 3 percent annual rate, as a result of high expectations for deregulation and tax cuts, Reuters said.

“Firms are optimistic both because of regulatory reform but also because they expect corporate tax reform and overall tax reform,” Hassett, chair of the Council of Economic Advisers, told reporters in a conference call.

“There has been a recent uptick in growth. The last quarter was 3 percent and now the most recent quarter’s 3 percent,” he said. “It seems likely that the fourth quarter is going to be in that range as well.”

(Newsmax wire services contributed to this report).

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Willem H Buiter, Global Chief Economist at Citi, said that the deficit effect of tax plan will be negative for the economy. However, tax cuts will lead to fiscal expansion.
citi, willem buiter, gdp, economy
Wednesday, 06 December 2017 08:58 AM
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