FTSE Mondo Visione Exchanges Index:
Nomura US Policy Alert - Change In Fiscal Policy Assumptions
Date 17/08/2010
In light of the clear
downshift in growth over the last several months, we are changing the assumptions
about fiscal policy that are embedded in our US economic forecast.
Specifically, we now expect a full extension of the Bush-era
tax cuts. Previously we had assumed that the tax
policies proposed by President Obama would be implemented. These tax changes
would extend the expiring 2001 and 2003 marginal income tax rates for
families (individuals) earning less than $250,000 ($200,000) while allowing
marginal tax rates for all others to revert to their pre-2001 levels at the
beginning of 2011. In addition, we now assume that the current (lower) rates
on capital gains and dividends will be extended. These changes raise our 2011
GDP forecast by 0.3 percentage points (pp) (to 2.6% y-o-y) and our 2012 GDP
forecast by 0.1pp (to 3.0% y-o-y). We believe that these changes will be
accompanied by a commitment to a full review of tax and spending policies in
the year ahead, but for forecast purposes we assume that 2011 tax rates will
carry over into 2012.
The change in our
forecast was driven by several factors. First, the economic
case for extension is strong. Activity is growing
below trend and risks to the outlook are skewed to the downside. Raising
taxes on any part of the population today is increasingly seen to be too
risky by mainstream economists. For instance, in the latest Wall Street
Journal survey, 33 of 46 respondents said they favored a full extension (only
3 favored a full expiration). St. Louis Fed President Bullard also argued on
CNBC recently: "Increasing taxes while you're trying to get the economy
to recover is not a good plan".
Second, there appears to
be sufficient political support for
delaying tax increases. Nomura's DC-based analysts believe that Congressional
Republicans overwhelmingly favor extension. Moreover, a number of centrist
Democrats (e.g. Senator Ben Nelson of Nebraska) have signaled they could now
support holding tax rates constant. The recent passage of unemployment
insurance benefits and aid to state governments was telling: a majority of
legislators see that it is too early to apply the fiscal brakes. On the tax
issue, members of Congress could argue that they should not allow any fiscal
tightening to occur while they await the recommendations of the national
fiscal reform commission.
Finally, an extension of
the tax cuts would be consistent with what we see as Washington's flexible
and aggressive response throughout the recession and financial crisis. The
Fed stayed true to this form by committing to reinvest MBS paydowns at its
last meeting. Despite the rhetoric around fiscal austerity, we believe fiscal
policymakers will not be far behind.
We intend to provide
further details and analysis of these changes in policy assumptions in the Global
Weekly Economic Monitor, published Friday.
