The economy can have a big effect on markets, and is one of the key areas where policy can impact investments. Both candidates are promising government stimulus that could benefit sectors such as construction and aerospace & defence, though there may be some disappointment in the scale and speed of government action.
The importance of fiscal policy
Fiscal policy is one of the major tools that governments use to influence a country’s economy. It defines the level and allocation of government spending and taxes, with new initiatives sometimes implemented through ‘fiscal stimulus’ programmes, such as infrastructure spending, or supportive tax policy - for example, tax relief for particular groups.
Typically US elections have implications for fiscal policy since candidates usually want to reward different interest groups, or have different views about spending and taxes in the medium term. These decisions can make a difference to how much money there is in the economy, and by extension corporate expenditure, employment, consumer spending. It can also shift the focus of the economy into different sectors, encouraging investment and expansion in some areas while limiting it in others.
For these reasons, investors will be studying the two candidates’ policies carefully to see where the opportunities might lie should one or the other gain the White House.
Tax policy is the other side of fiscal policy as it can provide tax relief to individuals or businesses, or provide funding for spending programmes through higher taxes.
- Mrs Clinton favours raising taxes and capping deductions for high-income households, while providing more tax credits for low-income households. She also wants to raise additional revenue by raising a tax on corporate profits earned abroad and not repatriated to the USA (an area that has been much in focus recently due to many US companies holding large amounts of cash offshore).
- Mr Trump is proposing an overhaul of US tax policy by reducing the number of tax brackets to three from the current seven, and by lowering the upper tax rate. He also plans to eliminate various other taxes. On the corporate side he has proposed a one-time profits repatriation holiday at a discounted rate, as well as a lower corporate tax rate on worldwide profits.
So, both candidates want to address the question of offshore corporate cash, probably to raise tax revenues for government spending plans. Some international corporate tax reform is likely, though the impact would probably be larger under a Clinton presidency.
For investors, fiscal policy changes may have implications for the dollar and for interest rates. Mr Trump’s proposals would reduce tax revenues, resulting in a larger US budget deficit and a higher debt to GDP ratio. This will lead to more US treasury issuance and potentially higher interest rates. The dollar might strengthen a little if Mrs Clinton implements a fiscal repatriation policy that leads to an inflow of foreign-held profits back into the dollar.
The sister strategy to fiscal policy is monetary policy, managed largely by the US Federal Reserve. We’ll be looking at this area in detail in a future US Election Insights.
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