Less than meets the eye
Last week, President Obama went before a joint session of Congress to propose a series of measures (the American Jobs Act) designed to spur economic growth and job creation. The proposals amount to USD447bn in tax cuts and new spending (about 3% of current nominal GDP). That may sound like a powerful dose of stimulus, but there is less to these proposals than meets the eye.
Trying to offset fiscal drag
Nearly half the proposals call for a continuation of policies that are already in place. Mr. Obama’s plan is as much an effort to stop a sizable fiscal drag from hitting the economy next year as it is an attempt to boost the current level of demand and job creation.
Uncertainty and spending multipliers
The effectiveness of a stimulus program depends on the response of the people who benefit from the tax cuts and spending increases enacted by the federal government. For “small” businesses who will receive a temporary tax break on their share of employee payroll taxes, the response is uncertain. The temporary tax break may simply be viewed as windfall and taken into profits. It might be used to pay down debt. Or it might actually be spent on new investments or used to hire new workers. The temporary nature of the tax break suggests the latter responses will be muted.
Small change
Our own forecasts for GDP growth in 2012 had already incorporated a continuation in some form of this year’s payroll tax cut and emergency unemployment benefits. Whether Mr. Obama’s proposed American Jobs Act creates an additional stimulus for 2012 through depends on how many of the new proposals are actually passed by Congress. We believe adoption of the Administration’s new stimulus plan would likely lower the downside risks to economic growth, particularly if it has an ameliorating effect on business confidence. But the impact is apt to be modest, especially since the impact of tax cuts for employers may be muted for the reasons cited above. Given the uncertainties surrounding the implementation and impact of the plan’s new proposals, we do not see a strong reason at this point to make a change to our outlook for 1.7% GDP growth in 2012.
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HSBC Global Research