A warning about tax cuts

Something for an Australian Coalition Government  to ponder, as it slavishly adopts the political blunders of the current US Republican Government.

The Guardian, 27 January 2018:

Donald Trump's huge tax cuts are a threat to the stability of the global economy, the managing director of the International Monetary Fund has warned.

Christine Lagarde singled out Trump's tax reforms as one of three risks that could destabilise the current economic recovery, especially given the boom in stock markets in the past year.

"While the US tax reforms certainly will have positive effects in the short term, for the US and other countries around, it might also lead to serious risks," Lagarde told the World Economic Forum in Davos.

 "That has an impact on financial vulnerability, particularly given the high asset prices that we see around the world, and the easy financing that it still available," she added.

She was speaking shortly after the US president told Davos that his tax reforms had created "a big, beautiful waterfall" of pay rises for US workers, as American companies passed the tax cut on.

However, the IMF is concerned that cutting taxes will lead to a bigger US budget deficit, and that extra borrowing by the US Treasury will force up long-term American interest rates. As a result, it fears growth could be choked off in the longer term, making the stock market vulnerable to a sudden downward lurch.

Lagarde cautioned against people becoming too complacent about the pick-up in global growth reported by the IMF at the start of the WEF's annual meeting. The IMF raised its forecasts for global expansion to 3.9% this year and in 2019, reporting that all major economies – the US, the eurozone and Japan – are doing better.

 "I don't think that we've completed the job," said Lagarde, who fears that the growing economic inequality in many countries is creating "fractures".

"Having growth is good, improving productive is good, but [policymakers should] make sure that the results of that growth are properly allocated," said the IMF chief, adding that inequality is growing in many advanced economies, and very high in emerging markets.

In addition to financial instability and inequality, Lagarde said a third risk was the lack of international cooperation and the geopolitical risks that could be created as a result.