U.S. tax cuts in 2018 would give GDP temporary boost, OECD says

Bloomberg.- U.S. tax cuts would give economic growth a temporary boost next year by stimulating business investment and consumer spending, before slowing employment gains drag down the pace of expansion in 2019, the Organization for Economic Cooperation and Development said.

U.S. gross domestic product will grow 2.5 percent in 2018 following a 2.2 percent rise this year, assuming taxes are lowered for individuals and companies in the second quarter of 2018, the Paris-based group said Tuesday in its annual report on the economic outlook for the year ahead. Expansion will cool to 2.1 percent in 2019 as growth of the labor force slows, limiting consumer spending.

The projection for a temporary economic jolt contrasts with forecasts by the Trump administration and Republicans, who say the tax plan will result in sustained growth of 3 percent or higher. The OECD’s forecast for 2018 hinges on accelerations in government spending and business investment, though the group says stronger corporate investment could boost wages and spur the Federal Reserve to tighten credit more rapidly — something the White House is counting on not to happen.

Risks to the outlook remain sizable,” the OECD said. One is that “elevated leverage ratios in the corporate sector need careful monitoring and action to ensure that these risks are contained.”

The OECD projections also assume the unemployment rate will fall to 3.7 percent in 2019, with inflation surpassing the Fed’s 2 percent target in the same year.

 

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