Hamish McRae: What would the Republicans do with the US economy?

Romney plans to cut federal spending to a little over 18 per cent of GDP by 2023

Share

Would the Republicans really be different – or more precisely, would US economic policy really be different with Mitt Romney as President, rather than Barack Obama? It is a question that we certainly have to contemplate and the events this week should focus our minds.

But, as always with such questions, you have to make a clear distinction between what politicians say before winning office and what they do once they are elected. The most recent example of this is François Hollande squeezing French fiscal policy more tightly than his predecessor did, notwithstanding his campaign promises. So you have to be careful.

That said, there are some glimpses of the direction the Republicans might head to be gleaned from the "Path to Prosperity" plan, prepared by vice-presidential nominee Paul Ryan, passed by the House of Representatives last April and then rejected by the Senate. The most recent version cuts spending, cuts taxes, and cuts the deficit. Quite how spending cuts are to be established is not clear, but the target is to cut federal spending to a little over 18 per cent of GDP by 2023. That compares with about 22 per cent at the moment but would be about the same level achieved by President Clinton by the end of the 1990s.

If these numbers seem very low to anyone here or in the rest of Europe, the explanation is partly that our numbers usually include all public spending, not just that of the central government, and state spending in the US bumps these numbers up considerably. You also have to adjust for healthcare, which in most of the world goes largely on the public budget, whereas in the US is only partly on it.

On the revenue side, under these Ryan plans, federal taxes would take a little over 18 per cent of GDP by 2023, which would leave the country with a modest running deficit. This would, however, be somewhat higher than the present US tax take, which at a federal level is running at only about 15 per cent of GDP. Tax rates would be cut to a top rate of 25 per cent for both income tax and corporation tax, the theory being that lower rates will bring in more revenue.

Independent estimates suggest that under this plan revenues would stabilise at a lower proportion of GDP, perhaps around 15 per cent – so to get to the 18 per cent figure, the next administration would have to close a large number of loopholes. That apparently is the aim, but the gap to be closed is big. President Obama's plans, by contrast, see revenues rising to just under 20 per cent of GDP, with spending coming down to 22 per cent.

What should the outsider make of all this? On the face of it, the choice is rather discouraging. We have a president who inherited a catastrophically large deficit, at around 11 per cent of GDP, but whose efforts to cut it have been ineffective. And we have a challenger whose numbers are difficult to reconcile. And under both sets of proposals, the country is still running a federal deficit equivalent to 2 per cent of GDP in 10 years' time. Meanwhile, there are automatic tax increases that will come in at the end of the year, the so-called fiscal cliff, if Congress does nothing. Oh, dear.

Two things make me more optimistic than this outline would suggest. One is that in the past the US has pulled back from fiscal disaster and corrected itself, most recently under President Clinton. The other is that the dynamics of fiscal policy will change after the election, whoever wins.

If governments can borrow very cheaply, they will. For the moment, the US and other "safe haven" governments can borrow at below the rate of inflation. But this is abnormal, indeed unprecedented in peacetime. So rates will rise – and that will force a change in policy, perhaps not before time.

A very rocky detour from the Rockies

For anyone interested in skiing, Jackson Hole is a decent Wyoming resort, not huge by Alpine standards but with some tricky black runs and, of course, the brilliant powder of the Rockies. For anyone interested in the world economy, however, it is a conference of central bankers, hosted by the US Fed, that takes place every year at the beginning of September. Bankers gather there later this week.

So there will be great attention paid to what Ben Bernanke, the chairman of the Federal Reserve Board, says on Friday. Will he hint that there will be another bout of quantitative easing? What will be his judgement on the state of the US economy?

There would also have been keen interest in anything coming from Mario Draghi, the chairman of the European Central Bank, which next week is expected to announce how it will cut the cost of finance in the weaker eurozone economies. Its key meeting is on 6 September.

Alas, there will be no leaks from Dr Draghi – for the simple reason that yesterday he suddenly cancelled his trip. The reason? A spokesman said it was "because of the heavy workload foreseen in the next few days".

But they must have known the calendar for months, so that does not really wash. So maybe the uncertainties as to what on earth the ECB can do are even greater than most of us thought.

h.mcrae@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Ashdown Group: Finance Manager - Covent Garden, central London - £45k - £55k

£45000 - £55000 per annum + 30 days holiday: Ashdown Group: Finance Manager - ...

Ashdown Group: Systems Administrator - Lancashire - £30,000

£28000 - £30000 per annum: Ashdown Group: 3rd Line Support Engineer / Network ...

Recruitment Genius: Graduate Web Developer

£26000 - £33000 per annum: Recruitment Genius: A Web Developer is required to ...

Ashdown Group: PeopleSoft Developer - London - £45k

£45000 per annum: Ashdown Group: PeopleSoft Application Support & Development ...

Day In a Page

Read Next
 

Isis in Iraq: Even if Iraqi troops take back Saddam’s city of Tikrit they will face bombs and booby traps

Patrick Cockburn
The Royal Mint Engraver Jody Clark with his new coinage portrait, alongside the four previous incarnations  

Queen's new coin portrait: Second-rate sculpture makes her look characterless

Michael Glover
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003