What could the US election mean for the economy?

In this month’s commentary our Chief Economist, Colin Warren, looks at some of the major policy proposals of Donald Trump and Kamala Harris, and evaluates their potential economic and financial market impacts.

As the U.S. presidential election approaches in November, voters are presented with two sharply contrasting candidates: former President Donald Trump and Vice President Kamala Harris. Their policies on critical economic issues like taxes, trade, immigration, and regulation will play a significant role in shaping the future of the U.S. economy and, by extension, global financial markets. Following the presidential debate of 11th September, betting markets give Harris a slight advantage over Trump¹. However, there is still everything to play for. In this month’s article, we explore some of the major policy stances of each candidate and evaluate their potential economic and financial market impacts.

Tax policy

Start with tax policies first. Donald Trump’s tax agenda reflects his focus on reducing the overall tax burden for businesses and individuals. Central to his platform is a proposed reduction in the corporate tax rate to 15% from the current 21%​. Trump also plans to make permanent key provisions of the 2017 Tax Cuts and Jobs Act (TCJA), which would otherwise expire in 2025. These measures include maintaining individual tax cuts and extending the business tax provisions that were designed to incentivise corporate investment. In addition, Trump has proposed eliminating taxes on Social Security benefits and reducing taxes on tips.

In contrast, Kamala Harris has emphasised more progressive taxation, targeting higher earners and large corporations. She has proposed raising the corporate tax rate from the current 21% to 28%, as well as quadrupling the tax on stock buybacks from 1% to 4%. Moreover, Harris would only extend the 2017 tax cuts for those earning less than US$400,000 a year, with the result that those earning above this amount would see their marginal tax rate rise to 39.6%. She has also proposed a 28% tax on long-term capital gains for those earning US$1 million or more. Increased revenues would fund expanded social programs, such as the child tax credit, as well as providing support for those buying a house for the first time. Harris has also adopted Trump’s proposal to make tips exempt from tax.

Given that Trump has not proposed any conventional revenue raising measures to offset his proposed tax giveaways (although higher revenues from tariffs could be forthcoming - see below), his agenda is likely to have a bigger impact on the budget deficit than that of Harris. Precise estimates should be taken with a pinch of salt given the lack of detail regarding many of the candidates’ policies. However, analysis from the University of Pennsylvania indicates that Trump’s plans would increase the budget deficit by US$5.8 trillion over the next 10 years, while those of Harris would add US$1.2 trillion². Considering that the annual budget deficit is already running at about US$2trillion, or 7% of Gross Domestic Product (GDP), this would mark a significant fiscal deterioration from already stretched levels³.

In themselves, the large tax cuts proposed by Trump would likely stimulate economic activity, but increased debt issuance and inflationary pressures would risk unnerving the bond market and lifting yields, which would provide a check to growth. The fiscal easing under Harris would be smaller, and would therefore presumably pose less of a risk to the bond market. However, her focus on lower-income tax cuts and targeted spending could stimulate consumer demand, offsetting some negative effects on business profits resulting from her increase in corporation tax. In isolation, equity markets would clearly prefer Trump’s corporation tax cut to Harris’s hike, but if worries about debt sustainability trigger a sharp rise in bond yields, it could have a deleterious impact on sentiment and valuations.

It should be noted that tax legislation requires Congressional approval, so it will be difficult for either Trump or Harris to implement their tax proposals unless their respective parties secure majorities in both the Senate and House of Representatives. Consequently, there is a good chance that the next President’s tax plans will be reined in by Congress. Indeed, a split Congress which results in failure to extend the TCJA tax cuts could see fiscal policy become a headwind to economic growth.

Trade policy

While both candidates are likely to adopt a tough attitude towards China, Trump’s protectionist instincts are considerably more extreme than those of Harris. Earlier this year, Trump proposed an across-the-board worldwide tariff of up to 20% on US imports, and a 60% tariff on Chinese goods. More recently, he has threatened to put a 100% tariff on countries that ‘leave the dollar’ (which could refer to countries that conduct trade or hold reserves in currencies other than the US dollar, although it is not clear exactly what he means by this).

The Harris approach is likely to be more targeted. Several tariffs implemented during the first Trump presidency (notably those on steel and aluminium) were maintained under President Biden, who also introduced new tariffs on specific Chinese exports including electric vehicles, semiconductors, and solar cells. Harris can be expected to keep these tariffs in place should she win in November.

The motivation for imposing tariffs is to protect domestic manufacturers, safeguard US jobs, and reduce reliance on foreign imports. However, the sharp jump in tariffs proposed by Trump is likely to be “stagflationary” in nature, boosting prices for US consumers and hurting economic growth, as trade partners impose retaliatory levies. Compared with measures introduced during Trump’s first term in office, when tariffs were imposed on 15% of US imports with an average tariff rate of 13.8%, Trump’s current proposals are likely to be significantly more impactful⁴.

Estimates from the Peterson Institute for International Economics suggest that a 20% across-the-board tariff combined with a 60% tariff on China would cost the typical middle-income household more than US$2,600 a year, even without consideration of the effects of potential retaliatory measures⁵. Rising prices and higher wage demands could in turn fuel inflation, which could put upward pressure on interest rates and bond yields. As regards equities, Barclays estimates that Trump’s tariffs could reduce S&P500 companies’ profits by 3.2% in 2025, with earnings falling a further 1.5% if trading partners retaliate with similar levies⁶.

It remains to be seen whether Trump would actually follow through on threats to raise tariffs, and his proposals could just be a negotiating tactic. However, under certain conditions, the president can impose tariffs without the approval of Congress. This suggests that Trump’s tariff increases would have a better chance of being enacted than some of his conventional tax proposals.

Immigration policy

Immigration is another area where there are big differences in the two candidates’ proposals. Harris supports putting more border agents on the border to control illegal immigration. More broadly, she would seek to address the root causes of migration from Central America, while also reforming the immigration system.

In contrast, Trump’s policy focuses on mass deportations of undocumented migrants who do not have the legal right to live in the US. He would also seek to make asylum claims more difficult.

A mass deportation programme would face considerable administrative and legal hurdles, but if implemented could have severe economic repercussions. Estimates suggest that there are currently approximately 11 million undocumented immigrants residing in the US, with around 8 million of working age (representing about 5% of the labour force)^7,8.

The loss of undocumented workers would have a large direct impact on industries such as agriculture, construction, and hospitality. Labour shortages could push up wages and prices in the most affected sectors. Moreover, given the loss of spending and the fact that many illegal migrants also run their own businesses, employment of legal workers would also be hit. According to one estimate, mass deportation would reduce GDP by 2.6%, or around US$5 trillion, over 10 years⁹.  Government revenues would suffer due to the loss of tax receipts, and house prices would presumably fall due to reduced demand.

The financial market impact of mass deportation is probably more clearcut for equities than for bonds. The hit to economic activity and increased labour costs in certain sectors would likely weigh on corporate profits, hurting broad equity market performance.  However, while weaker GDP and safe-haven flows are likely to put downward pressure on US Treasury yields, upward pressure could arise as a result of cost-push inflation and a deterioration in the public finances.  

Regulatory policy

In the broad area of government regulation, a Harris administration can be expected to adopt a more interventionist approach, while Trump’s instincts would be to deregulate. If elected, Trump has indicated that he would set up a ‘government efficiency commission’ led by the tech entrepreneur Elon Musk to cut back unnecessary public spending and reduce government regulations.

According to Goldman Sachs, several sectors could benefit from Trump’s drive for deregulation¹⁰. The oil and gas sector could benefit from a dialling back of environmental regulations, while a bid to reduce the powers of financial regulators and make capital/liquidity requirements less onerous will be welcomed by the financial sector.  

In contrast to Trump, Harris is likely to maintain a strong focus on climate change and the promotion of renewable energy sources. However, more recently she has sounded more supportive of the oil and gas sector (no doubt in a bid to broaden her electoral appeal in swing states such as Pennsylvania, as well as fostering energy security).

With many Americans still struggling with the cost of living, Harris has pledged to ban so-called price gouging (where companies exploit supply shortages to rip off consumers) in the food/grocery sector. She also plans to negotiate with big pharmaceutical companies to lower drug prices.

Government attempts to control prices are generally not favoured by conventional economists, as they can distort markets, lead to shortages, and reduce investment. Cracking down on anti-competitive practices should foster innovation and be good news for growth and inflation. But formal price controls could jeopardise the efficient allocation of resources across the economy, which could ultimately stifle economic growth. Much will depend on how policies are implemented, but profit margins in targeted sectors could potentially be hit.

Continuity vs. Disruption

As we have seen, there are stark differences between the economic policy proposals of Donald Trump and Kamala Harris. As current Vice President, Kamala Harris represents the “continuity candidate”, whereas a Trump presidency could see dramatic policy changes in certain areas.

Taking all policy proposals into consideration, the potential downside risks to the US economy are probably greater under Trump than under Harris. Precise forecasts carry a high degree of uncertainty, and are subject to political bias and the assumptions made. However, by way of illustration, Goldman Sachs reckon that the hit to growth from tariffs and tighter immigration policy under Trump would outweigh the fiscal impulse, resulting in a peak hit to GDP growth of 0.5 percentage points in the second half of 2025¹¹. Should the Democrats take the Presidency and Congress, new spending and tax-credits would slightly more than offset lower investment due to higher corporation tax, resulting in a very slight boost to GDP growth over 2025-26. If Harris wins with a divided Congress, the effects of policy changes would be small, according to Goldman.

Of course, forecasts rarely turn out to be right, and it is worth remembering that the performance of the US economy during the first Trump presidency was generally better than many had expected. Whichever candidate wins, many of the policy proposals set out during the election campaign will probably not come to fruition, be it due to lack of support in Congress or external opposition. Moreover, government policy is just one element influencing the economy and financial markets, and other factors (e.g. monetary policy, geopolitical developments, corporate profitability etc.) will also shape the outlook. This said, given the gaping policy divide between the two candidates, political developments could become an increasingly significant source of financial market volatility as election day approaches.

17^th September 2024