Gilles Moec Macrocast: Paying Tax Cuts with Carbon
- 18 November 2024 (10 min read)
The appointments by Donald Trump of radical loyalists to cabinet positions or as head of key federal agencies should be taken as a sign that the new administration “means business” when it comes to the implementation of the campaign platform. However, the Republican caucus in the Senate has chosen as leader a more independent – and traditional – figure with John Thune. This suggests that getting the fiscal package through may not be straightforward. We look into how the savings from rolling back the IRA – e.g. the EV tax credit - combined with tariffs, could plug some of the hole the extension of TCJA, cut in the corporate tax and exemption of social security benefits would drill in the US budget. It would be a mistake to consider the Trump administration’s key economic proposals on the green transition and international trade as purely ideologically motivated: there is also a “fiscal expediency” aspect to them. The tax cuts would be paid – in part - by more carbon emissions. If investors believe that the new administration will not go as far as what the platform implies, because Donald Trump will want to preserve the equity rally, then they also must accept that, should he not roll back on the IRA nor hike tariffs significantly, he probably won’t be able to give them all the “sugar rush” they expect in terms of tax cuts ahead.
The Federal Reserve stated that they would not “speculate” on what the Trump agenda may mean for inflation, but even before the new administration is inaugurated, the dataflow is not all encouraging on the consumer price front. For two months in a row, the core inflation momentum has moved up. The December cut hangs by a thread.
The ECB will have to go faster and probably deeper than what the Governing Council expected in the “restriction removal” process. What seems to be a hot topic right now in Frankfurt is whether they should be clear about it and move into forward guidance. Piero Cipollone’s speech last week was going in that direction, while Isabel Schnabel wants to stick to a pure data dependent mode. We think the forces of gravity are now favouring the doves.
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