The United States government’s receipts from taxes, social security contributions, customs duties and other items fell by 0.4 per cent in 2018, as reduced tax rates more than offset the impact of an expanding US economy. Getty Images photo by Bill Dickinson.
Trump administration probably cannot repeat same stimulus to US economy in 2019/2020
By John Kemp
LONDON, Feb 22 (Reuters) – The US government pumped up the economy in 2018 by taxing less, spending more, especially on defense, and boosting borrowing, but it probably cannot repeat the same stimulus in 2019/2020.
As the fiscal stimulus from last year fades, economic growth is set to slow, especially in the manufacturing sector, which has been a major beneficiary from higher defense spending.
The federal government’s receipts from taxes, social security contributions, customs duties and other items fell by 0.4 per cent in 2018, as reduced tax rates more than offset the impact of an expanding economy.
Federal revenues have recently been growing at some of the slowest rates outside recession periods in the last four decades (“Monthly Treasury Statement”, U.S. Bureau of the Fiscal Service, Feb. 13).
At the same time, government spending has continued rising at a rate close to its long-term average, with federal outlays increasing by more than 4.4 per cent last year compared with 2017.
The result has been a massive fiscal stimulus in an economy already well advanced in the business cycle with unemployment at multi-decade lows and limited spare capacity.
Much of the extra spending has been directed towards the Department of Defense, where outlays jumped by almost 5.6 per cent in the fiscal year to September 2018.
Within the military budget, a big part of the extra spending has gone on equipment, with procurement surging by 8.2 per cent in fiscal 2018, up from a 1.4 per cent increase in fiscal 2017 and 1.3 per cent in fiscal 2016.
Much of the extra spending has been directed towards long-lived hardware rather than non-durable items, giving a massive boost to the defense industrial base.
U.S. manufacturers reported that new orders for defense capital goods grew at an annual rate over 20 per cent in 2018, separate data published by the US Census Bureau showed.
New orders for defense capital goods rose four times faster (23.7 per cent) than new orders for non-defense capital goods (6.0 per cent) last year, according to the Census Bureau.
The question is whether this rate of fiscal expansion is sustainable, and, if not, what will happen when the military spending boom slows.
The government recorded a deficit of $779 billion in fiscal 2018 (3.8 per cent of GDP), according to the U.S. Congressional Budget Office (“Budget and economic outlook”, CBO, January 2019).
On current policies, the deficit is already projected to increase to $897 billion in fiscal 2019 (4.2 per cent) and $1.1 trillion by fiscal 2022 (4.7 per cent).
The scope for boosting the economy further by cutting taxes or increasing spending may therefore be more limited in future.
Higher government spending and lower tax payments made a major contribution to the rise in US manufacturing activity last year, but the boost may not be repeatable in 2019 and 2020.
John Kemp is a Reuters market analyst. The views expressed are his own.
(Editing by Dale Hudson)