Republican tax plan fails to impress Schroders multi-manager

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While the passage of the Republican tax plan through the US Senate has been welcomed by markets, the rushed legislation is failing to impress Schroders multi-asset manager Robin McDonald.

On Friday the Senate passed a bill that is set to cut corporation tax from 35 per cent to 20 per cent. In early trading after the weekend the blue-chip Dow Jones index was up 1.2 per cent to 24,524.74. It finished the day at 24,290.05.

But McDonald says it is a “pretty odd time” to be introducing tax cuts. He says when the unemployment rate is at 4.1 per cent the fiscal multipliers from such reforms are “pretty much close to zero”.

“Fiscal multipliers would have been fantastic at the height of the financial crisis when unemployment was at 10 per cent,” McDonald says.

“I’m not saying tax cuts won’t give a pop in GDP growth relative to what it otherwise would have been. I would have thought that would be offset by the fact you’re blowing out the budget late cycle and also inflationary pressures, which are building gradually in the US economy.”

The package is set to increase the deficit $1.5trn.

McDonald says investor expect the US economy to grow while inflation remains low. But McDonald says if unemployment falls to 3.5 per cent, wages could start growing at 4 per cent.

“The bond market and equity are not priced anywhere near where if the US Fed had to react to 4 per cent increases in wage inflation. The US Fed has already said they don’t want wages growing any quicker than 3 per cent.”