Investment Clock insights

Trump budget proposals re-iterate GDP growth target

Ian Kernohan

24 May 2017

In the immediate aftermath of the Trump election victory last November, there was much anticipation of a major fiscal stimulus. While the Trump administration and Congressional Republicans differed over the mix of tax and spending changes, it appeared they were both united in wanting significant policy measures to be enacted. In the event, such has been the volatile character of the Trump administration, that reaching any kind of agreement between the President and Congress on any issue, let alone a major shift in fiscal policy, has proved to be very difficult.

The administration has now published its budget plans and reiterated a target of 3% GDP growth, with the economy expected to respond to tax reform by generating enough extra growth, such that tax cuts “pay for themselves”.  Potential GDP growth was 3.5% during the 1950-2007 period, when labour force growth was +1.6%year-on-year, boosted by rising female and baby boomer participation, while productivity growth remained close to 2% per annum. Since the Global Financial Crisis however, potential growth has slowed, as baby boomers retire and labour productivity has slowed.  Even if productivity picks up a bit, it’s hard to see potential growth much in excess of 2%, thanks to the ongoing demographic drag.  With a deterioration in trend growth and the unemployment rate already very low, the US economy cannot expand at 3%+ without running into inflationary overheat and a more hawkish Federal Reserve, followed by an inevitable recession. 

All this may be academic however, as these budget proposals are unlikely to get through Congress. The Republican party needs the support of the Democrats in the Senate, and even Republicans themselves will have doubts about some of the measures.  I would expect some form of compromise deal later in the year.


The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.