As of 20th January 2017, Donald Trump was inaugurated as the 45th President of the United States of America. Along with him, he brought many new policies and vows. Of which one of his vows is to make deep tax cuts while promising to increase government expenditure. He has said that he will be cutting corporation tax from 33% to 15%. Perhaps this is a conflict of interest, and it would suit his company, but there is a reason behind this. According to the Financial Times, this would increase the national debt by $7.2 trillion (including interest costs) over the first decade and by $20.9 trillion by 2036. For most people, this would seem unintelligent. However, this is what is known as expansionary fiscal policy. Furthermore, he has said he will be increasing spending on infrastructure and the military but he will be reducing spending on other categories (apart from health and retirement programmes) by 1% each year.
So how does this work? Fiscal policy is the deliberate manipulation of government spending and taxation in order to influence the economy’s economic growth. A decrease in tax will boost income, demand and GDP. When the government decreases taxes, disposable income increases. This means that consumers will demand more and therefore result in higher production, shifting the aggregate demand curve to the right, leading to an increase in GDP. An increase in government spending will boost demand and production. This will also create more jobs which mean that unemployment will reduce. Government spending increases the potential output of the economy. Also, lower corporation taxes mean that firms can invest more, contributing to AD – as investment is a component of AD, when it increases so does AD.
Yes, Trump is right in saying that tax cuts and additional public spending will lead to faster growth and in the long-run, an improvement in the US public finances. Although, who is the cut in taxes really benefitting? It will far more benefit to high-incomers rather than the low-incomers. Those earning more than $3.7 million a year would receive a tax cut of nearly $1.1 million; however, those who don’t earn as much receive a tax cut of just $110 a year. Furthermore, this policy of his may lead to a budget deficit. This is where government expenses exceed the revenue received. In order to fix this issue, the US government may have to borrow money to finance the difference – this therefore increases national debt instead of trying to decrease it.