Commission: We ‘stuck our neck out’ assessing Trump’s plan

Experts welcomed European Commission’s assessment of US President Donald Trump’s fiscal stimulus package despite the high level of uncertainty around the plan.

Donald Trump promised last summer to rebuild ageing infrastructure across the US and deliver tax cuts to fuel the US economy. On Monday (13 February), the Commission became arguably the first institution to try and calculate the impact of this stimulus programme, despite the fact that its size and composition remain unknown.

Amid the post-truth and “alternative facts” era that the Trump administration has brought to the political landscape, the Commission’s attempt was rather an effort to shed some light on this issue, experts agreed.

“We stuck our neck out,” admitted director-general for DG Economy and Finance, Marco Buti, in an event hosted by the European Policy Centre on Tuesday (14 February).

He recalled that the winter forecast included a “technical assumption” to take into account political developments in the US. Otherwise, the US forecast would have been “less meaningful”.

Trump said last August that the plan to rebuild US infrastructure would cost “at least double” the figure given by her rival Hillary Clinton. Clinton’s plan had an estimated cost of $275 billion over the next five years.

On top of the extra spending for bridges and schools, Trump intends to cut raxes for middle-income households.

The Commission said that the cost of the fiscal stimulus would be €226 billion. Moreover, it would increase the public deficit to 5.7% of GDP next year, compared to the 4% expected three months ago. The public debt would also soar to reach almost 110% of GDP in 2018.

Still, the impact will be “very low”, according to the winter forecast.

The cost could be even higher. Jeffrey Franks, Director of the IMF Europe Office, pointed to the figure circulating among experts and analysts of one trillion dollars, although the time frame is unknown.

In light of the expected fiscal plan, the Fund revised upwards its forecast for the US in January, both for 2017 and 2018.

The IMF expects a GDP growth of 2.3% in 2017 and 2.5% in 2018, a cumulative GDP growth of 0.5% compared to its October forecast.

Meanwhile, the Commission expects the US economy to grow at 2.3% of GDP and 2.2% respectively, compared with 2.1% and 1.9% predicted three months ago.

The Fund agreed that the positive effects of the stimulus would kick in before the negative impact of other policy decisions, such as potential protectionist measures flagged by the new Administration.

“Could we be wrong? Yes,” confessed Franks.

Despite the high level of uncertainty, Buti recalled that, in the case of the US, the executive was bolder because its forecast would not have policy implications, as is the case with the EU’s national governments.

Under the ‘no policy change’ assumption applied to the member states, the Commission only takes into account in its deficit or growth forecast measures already adopted or announcements with sufficient levels of detail.

‘Best guesses’

Fabian Zuleeg, EPC Chief Executive, pointed out that economic forecasts did not have to be “true” but “best guesses”.

In the current environment, in which every tweet and every speech has an economic impact, these outlooks are “more difficult”.

In light of these difficulties, he defended the role of think-tanks, rather than public authorities, to conduct these analyses.

Gregory Claeys, Research Fellow at Bruegel think-tank, disagreed with Zuleeg.

He considered that institutions with established models and ample resources, like the Commission, are in a better position to draft economic outlooks.

Claeys added a note of caution to the executive’s estimate.

It was a “very difficult exercise” because there is “a lot of uncertainty” around the fiscal stimulus.

“They made it the best they could,” he told EurActiv.com in a phone conversation.

‘Low impact’

Despite the vagueness of Trump’s plan, he agreed with the Commission about the “low economic impact” expected.

Considering that the US economy practically shows full employment today, the multiplier would be lower, he commented.

“It would have been more useful three or four years ago,” he added.

The Commission pointed out in its forecast that Trump’s plan would force more tightening of monetary policy, limiting the beneficial side effects.

The positive impact would also be more limited given that part of the stimulus could come from tax cuts for the wealthy, Claeys stressed, and they are more inclined to keep the extra dollars in their pockets.