Societe Generale have released a new report highlighting the impact of the expiration of the Bush tax cuts and the end of fiscal stimulus on U.S. GDP in 2011. Quite clearly, it is not going to be good.
Their projection is for a 0.9% fall in GDP in 2011. That includes a fall of around 0.5% due to the expiration of the Bush tax cuts and the remainder from the loss in fiscal stimulus.
And their belief is that if the private sector is continuing to deleverage, than the government needs to step in, which means more fiscal stimulus. This isn’t far removed from the approach of Richard Koo of Nomura, who argues that due to the U.S. private sector’s preoccupation with cleaning up its balance sheet, the government must step up and spend in its absence.
But the reality is the plans President Obama has recently announced may not be enough to actually impact U.S. growth.
At face value, the latest proposals add up to about 2.5% of GDP, but the impact on the economy is likely to be much less, particularly over the long-run. We suspect that fiscal multipliers for tax breaks are quite small in the current environment given that businesses are showing a strong impulse to preserve cash. The unwillingness to spend is driven by two key factors: uncertainty about future demand and uncertainty about the tax/healthcare/regulatory environment. As long as businesses regain some visibility on these issues, they are unlikely to boost investment, even in light of substantial temporary tax savings.
So, what about direct investment? Societe Generale claims the U.S. government plans don’t hold enough to change the course of the recovery and that there is significant opposition to further direct government spending stimulus.
Sounds about right to us: even though the private sector clearly isn’t going to spend all that much, the public sector is being stopped from spending by ideological imperatives.