Govt. should take a cue from Trump economics

8 August 2018 09:59 am

Trump victory in 2016 was powered by economically downtrodden voters who were driven by their fears of insecurity about their and their children’s economic future. For those people after several years, America’s economy is finally showing great promise to them. 

The Dow has set an all-time high 70 times in 2017, while the unemployment rate has neared an all-century low. Manufacturing confidence is higher than ever and confidence among home builders is now an all-time high. After a tough year for traditional retailers, holiday sales are projected to hit their highest level in three years. 
In the last year of the Obama administration, the economy was decelerating with a dismal 1.6 percent growth rate. The economy revved up to a 3 percent growth rate in the April-June second quarter this year. The third quarter gross domestic product (GDP), estimates a 3.4 percent growth.

It’s easy to read too much into short-term trends. But the renewed hope is in the right direction of the economy and is confirmed by many other indicators, almost all of which point straight up. 

The Dow Jones industrial average is up over 3,000 points (starting with the 700-point rally the day after and the net wealth of Americans — mostly through their pension funds — has increased by more than US $ 4 trillion. This is also reflected in nearly 210,000 monthly job growth and an unemployment rate — even the more meaningful measure of joblessness that includes people who have dropped out of the workforce — that too is steadily falling.

The rate of job growth for black Americans is also nearly 40 percent higher than the monthly average under President Obama. The stock market, performance in 2017 and 2018 has been remarkable. The Dow has added 5,000 points in a calendar year for the first time ever. 

Trump strategy 

Though much of the attention on US President Trump focuses on what he says and tweets daily and though many of it is never taken seriously by the people, in his one + years in office he has already had a major impact on several key issues affecting the people in the US and around the world. 

The economic success, according to top economists in the US, is partially due to the massive tax cut that Trump gave to the US companies. Trump reduced the corporate tax rate from 35 to 21 percent and reduced income taxes for individual citizens across the board while doubling standard deductions. By far, the biggest share of those cuts, however, benefits companies and high earners: taxpayers earning more than US $ 700,000 a year, who make up one percent of all taxpayers, will receive 20 percent of the total tax cut. 

And while the tax cuts for businesses are permanent, the reductions for individual taxpayers will expire after 10 years. The tax cuts are financed on federal borrowing, leading to an increase in the federal budget deficit of about US $ 1 trillion over the next 10 years. However, it was supposed to unleash a huge amount of new investment in the country, in the form of more jobs, new factories, upgraded technology and better salaries and benefits. 

The growth would have been faster if he did not mishandle the EU relationships. Major US companies have certainly benefited from Trump’s emphasis on tax cuts, protectionism and deregulation. No doubt, his corporate tax reform will increase profits, especially for large groups, large banks and retailers helping aggregate demand to expand. 

There is also clear evidence of Trump’s policies helping specific sectors. Today, more and more Americans are finally giving Trump the credit for the stock market growth and the economy overall, despite his cowboy antics. 

Sri Lanka

The current government is attempting to develop its infrastructure to increase its economic potential and growth. However, the previous government plunged Sri Lanka deep into a pit of debt, pushing the country to the brink of bankruptcy and needing an International Monetary Fund bailouts and forcing them to sell of off some of the unproductive assets. 

The current government also has done little to improve the nation’s balance sheet. The official estimate of what Sri Lanka currently owes its financiers is US $ 66 billion — US $ 8+ billion, of which is owed to China. The country’s debt-to-GDP currently stands around 75 percent and 95.4 percent of all government revenue is currently going towards debt repayment. In this situation, the government finds it very difficult to do what trump did in slashing taxes. A lot can be done however. What it can certainly do to improve its fortunes are to:

 

• Facilitate investments, investment access for MNCs through a single window and increase access to debt finance for SMEs.
• Activate small and medium enterprises to drive economic activity.
• Reduce taxes for lower-middle-income earners and increase taxes on super luxury products, for e.g. on high-end cars.
• Reduce of VAT on household expenses.
• Increase affordability and disposable income levels for households.
• Reduce the housing and construction costs.
• Encourage investments in renewable.
• Create markets for local farmers to get a decent price by improving the rural infrastructure. 
• Support the capital markets.
• Cut back on unnecessary state expenditure to reduce the Rs.900 billion budget deficit.
• Finally, be firm in their decision-making.
• In the final analysis, the Sirisena-Wickremesinghe government’s fortunes depend largely on the economy, far more than the economy depends on them and the government. Also, young people, unlike ever before, care much more about how the government spends its tax money and will certainly hold their leaders accountable in 2020.

 

(Dinesh Weerakkody is a thought leader)