U.S. tax cuts bad idea now but will boost growth, say economists

The U.S. government was wrong to cut taxes at this stage of the business cycle given the economy is near full employment, but will nonetheless help lift growth this year.

Published: 15th February 2018 08:18 AM  |   Last Updated: 15th February 2018 08:18 AM   |  A+A-

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By Reuters

The U.S. government was wrong to cut taxes at this stage of the business cycle given the economy is near full employment, but will nonetheless help lift growth this year and give the Federal Reserve more reason to raise rates, a Reuters poll of economists found.

While the 2018 growth outlook was once again upgraded in the latest poll of over 100 economists taken Feb. 8-14, expectations for when the Fed's preferred inflation measure reaches its target was pushed back a quarter to early next year.

The poll forecast the Fed's preferred inflation gauge - core PCE prices - would average below the 2 percent target in each quarter this year. The survey was taken before news on Wednesday that U.S. consumer prices, a separate measure of inflation, rose more than expected in January.

Still, the Fed is likely to raise rates three times in 2018, in line with the central bank's own projections, even though some U.S. policymakers are still worried about weak wage inflation and overall price pressures.

But the unemployment rate is at a 17-year low of 4.1 percent, and many economists are warning that more fiscal stimulus right now is not what the economy needs.

"The timing and the composition (of tax cuts) was wrong. Infrastructure spending could have done more for productivity and future growth than giving businesses more money," said Brian Schaitkin, a senior U.S. economist at The Conference Board.

Although Fed Chair Jerome Powell, who took over from Janet Yellen this month, is widely expected to follow his predecessor's predicted policy path, the probability of more than three rate hikes this year has increased.

A handful more economists expect four rate hikes this year than in last month's poll. After the January inflation numbers, markets were pricing in about a one-in-four chance of four rate hikes this year, up from about one-in-six last week.

The consensus view in the poll was for the federal funds rate to go up in March by 25 basis points to 1.50-1.75 percent. The Fed is then expected to hike in the second and third quarters, taking rates to 2.00-2.25 percent by end-2018.

TAXING QUESTION

Suggesting the $1.5 trillion tax package could shift forecast risks toward higher rates, and faster, about 90 percent of over 50 economists who answered an extra question said passing the cuts was wrong given unemployment is so low.

"Adding to the deficit now is subject to criticism not just because the economy has reached full employment and needs less, not more, demand-side stimulus," wrote Jim O'Sullivan, chief U.S. economist at High Frequency Economics, in a note.

"It can also be criticized on the basis that deficit and debt levels are already too high; the higher they go, the less scope there will be for fiscal stimulus when it is really needed."

Nearly 90 percent of more than 60 respondents said that over the past month, their conviction around their Fed rate forecasts had either increased or stayed the same.

But those aggressive tax cuts President Donald Trump signed into law are expected to give a lift to an already-growing economy during a global boom. The growth outlook was upgraded to 2.7 percent for this year from 2.6 percent predicted last month.

If achieved, that would be the best since 2.9 percent in 2015.

The current U.S. economic expansion, which has already stretched for 102 months since the 2007-09 recession, will last at least another two years, according to 33 of 56 economists who answered an extra question.

If those predictions come true, it would mark the longest economic expansion in more than 150 years, based on National Bureau of Economic Research data. (http://www.nber.org/cycles.html)

However, a few economists in the latest survey expect the current expansion to come to an end in the coming year. None did the last time Reuters asked these questions, in August 2017.

"Expansions never die of old age - they are ended by the Fed," wrote Scott Brown, chief economist at Raymond James and Associates.

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