Howdy all. Slaveman you raised the question about implications of the new US President. I thought y'all might be interested in this review by the Macquarie research team (29 October 2008)of the Democrat and Republican economic policies ahead of the November 4th US election, how they stack up and the implications for the US federal budget:
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IMPACT
�� While Obama and McCain take somewhat different slants on taxation, housing, job creation and coping with the credit crisis, rising recession woes suggest a ramp-up in fiscal stimulus is in train in the US. Regardless of the outcome of Election Day, this is expected to jump sharply.
�� Efforts to support the economy, in addition to other ambitious programs, mean the deficit could at least double as a proportion of GDP in the 2009 fiscal year, to 6%.
ANALYSIS
�� With the US entering a period of very weak activity, the economy has come to the forefront of debate between the two presidential candidates. So how do Obama and McCain stack up on the key economic issues?
THE CREDIT CRISIS
�� McCain: proposed an additional US$52.5 billion package comprised of spending on troubled mortgages, and tax cuts to capital gains, IRA and 401k retirement accounts and unemployment benefits.
�� While typically an opponent of government regulation, McCain has indicated he would tighten up current financial system controls by reducing the number of federal agencies involved. He has also suggested he will impose tougher capital and disclosure requirements for financial institutions, and wants more corporate governance regulations.
�� Obama: plans to spend an extra US$60 billion on tax credits, infrastructure and renewable energy investment to shore up growth. Obama attributes “the worst financial crisis since the Great Depression” to lax regulation, and also plans to streamline financial regulation in the US. He was already calling for an overhaul prior to the recent episode of the credit crisis, though has not indicated which federal bodies would be closed or merged.
INDIVIDUAL TAXATION
�� McCain: the Republican candidate has announced he will cut tax rates on long-term capital gains in half to 7.5% in 2009-2010, and will increase the amount of capital losses that can be written off against ordinary income fivefold, to $15,000, in 2008-2009. Taxes on unemployment insurance will also be suspended to the end of next year. McCain would also extend most of the Bush administration’s tax cuts, which were across the income spectrum and would otherwise expire after 2010. Longer-term, McCain also promises a US$5,000 tax credit for families to purchase health insurance. He would offset this by taxing employer-provided health benefits as income, and by trimming down Medicare and Medicaid.
�� Obama: proposes to cut taxes immediately for households earning less than US$250,000, and for senior citizens earning less than US$50,000. Households would receive a US$1,000 cut, and individuals a US$500 reduction. Unemployment insurance will be extended, and taxes on unemployment benefits suspended temporarily. A 10% refundable tax credit on mortgage interest payments would be available to certain households.
�� Obama also plans to repeal the Bush administration’s tax cuts for people in the top two marginal tax brackets, and instead provide new breaks for savings, college expenses and new farmers.
BUSINESS TAXATION
�� McCain: promises to cut the corporate tax rate, with the rate to drop to 25% by 2015, from 35%. He will also implement tax deductions for businesses that invest in certain capital equipment in the longer-term.
�� Obama: will remove capital gains taxes for small and start-up businesses, and allow small firms to write off investments of up to US$250,000 until the end of next year. Businesses who take on new employees in 2009- 2010 would also receive a US$3,000 income tax credit for each additional hire.
HOUSING
�� McCain: emphasises that stabilising the housing market is the key to economic recovery. Accordingly, he intends to buy up US$300 billion in subprime mortgage assets directly from financial institutions. The government would then restructure the loans as fixed-rate, governmentguaranteed mortgages at the properties’ reduced value. In resolving the mortgage crisis, he proposes splitting up and privatising Fannie Mae and Freddie Mac, removing their effective government guarantee. He argues that any federal assistance for borrowers must be temporary. Finally, McCain wants to work towards a more transparent mortgage lending process.
�� Obama: plans to enact a 90-day moratorium on most home foreclosures. Unlike McCain, Obama has not indicated the form Fannie Mae and Freddie Mac would take, once the housing market stabilises. He proposes tightening laws against abusive lending practices and mortgage fraud, as well as improving disclosure from lenders, in the longer-term.
INDIVIDUAL RETIREMENT ACCOUNTS AND SUPERANNUATION (401K)
�� McCain: promises to temporarily suspend compulsory annual withdrawals from these accounts, currently enforced on those account holders over 70.5 years of age. He will also allow savers under the age of 59.5 to withdraw up to $50,000 at the lowest tax rate on 2008- 2009.
�� Obama: also indicates he will suspend mandatory withdrawals for the applicable age group. Withdrawals made up to the minimum will also be tax-exempt. Savers under 59.5 years of age would also be able to withdraw up to US$10,000 without penalty.
JOB CREATION
�� McCain: proposes building 45 nuclear power plants by 2030, to create 700,000 jobs. Also recently supported the legislation to provide US$25 billion in loan guarantees to automakers.
�� Obama: will invest US$25 billion to repair roads and bridges. He also plans to double loan guarantees for automakers to US$50 billion.
“IS IT EXPENSIVE? YES.”
�� The fiscal impact of the proposed reforms is appreciable, for both candidates. McCain’s economic plans are expected to come with a US$352.5 billion price tag, while Obama’s should total US$175 billion over two years.
�� At the same time, McCain has suggested he will balance the budget by the end of his first term in 2013, and Obama has indicated he will deliver reduced budget deficits. While neither candidate has provided sufficient details for the cost of all of their spending plans to be properly estimated, it seems unrealistic to expect a sharp improvement in the budget balance given the economic backdrop.
�� Diminishing tax revenues, with economic activity deteriorating, cuts coming into effect and the fall in the oil price pressing on the industry’s tax contributions, suggest this is an unlikely environment for fiscal austerity.
�� It is hard to see how McCain’s administration would achieve the freeze in domestic spending in its first year, and around US$100 billion in cuts in each subsequent year, to get the budget in balance. Generous tax cuts and the proposed purchase of some US$300 billion of troubled mortgages make this especially challenging.
�� For Obama, shrinking the deficit also looks to be hard task, particularly given his promise for near-universal healthcare. Furthermore, the question of the ballooning cost of the Medicare and Medicaid programs has still gone unanswered by both parties.
�� This suggests then that regardless of who is appointed to the oval office, a Clinton-type scenario of improving budget deficits can be ruled out, at least in the nearterm. The very weak economic outlook, and the absence of supportive uptrend in American productivity in the early 1990s will be unhelpful.
�� Instead, a sharp widening in the deficit, akin to the jump after the Bush administration was sworn in in 2001, seems likely. The tech-wreck recession and the cost of the war on terror quickly turned the surplus into a deficit, with the budget balance swinging 2.8 percentage points, to -1.5% of GDP. However, this time the rise in the deficit will be coming from a much weaker base.
�� As a result, an increase of a similar magnitude from the 2008 fiscal year would mean the budget deficit would near 6.0% of GDP. The last time the deficit was this high was in 1983, under the “Reagonomics” policy in the aftermath of the 1982 recession.
�� This could be surpassed in 2009. The deficit should well exceed this year’s record US$455 billion, or 3.1% of GDP. The net cost of the Troubled Assets Relief Program, declining tax revenues, and a jump in fiscal stimulus above this year’s US$168 billion, promises to bump up the deficit, regardless of who wins the presidency. This would need to climb to US$700 billion to get back to its post World War II peak of 6%,a plausible outcome with clear upside risks.
�� And with some action on the economy promising to get underway before the new president is in office, the jump in the deficit could get a head start. Obama has proposed several actions that could be pushed through a “lame duck” session of Congress. For example, the proposed individual tax cuts could be expedited. A “lame duck” sitting could also pass McCain’s proposed tax breaks. Early moves should gain bipartisan support, given the Bush administration recently said it is “open” to a stimulus package.
�� Indeed, with both candidates having acknowledged the severity of the economic situation, cost will not be a major consideration when they try to shore up growth. The new president, whoever he may be, will attempt to blast away weak growth, despite the hit to the budget.
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