THIS APPEARED IN THE IRISH EXAMINER 30th NOVEMBER 2020

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GOVERNMENT HAD NO CHOICE OTHER THAN TO RE-OPEN

2020 is a year that we will all want to forget about as quickly as possible, and we hope that we can look forward to a better 2021. Naturally, how good 2021 will turn out to be from a societal and economic perspective will be totally influenced by vaccine-related issues, rather than anything else. In that context, there are certainly grounds for optimism at the moment. We can only hope that safe and effective vaccines will delivered over the coming months, and equally our health authorities will do a better job of dispensing it than they have done in managing the crisis since March.

Last week we heard some government heads pointing out that many of Ireland’s COVID-related statistics are now amongst the best in Europe. I guess that is what is achievable, if policy makers are prepared to sacrifice business, livelihoods and the mental health of the nation. Ireland has endured the toughest restrictions across the EU, so naturally we should be doing better than others on the infection front.

We could obviously have remained locked down for another two months, in which case our COVID statistics might look great, but at what cost? A series of rolling lockdowns is not a good strategy, and is indicative of policy failure in other areas. As Government has said, but had until Friday last appeared to ignore, we have to learn to live with the awful virus.

I was somewhat amused and somewhat angered over the weekend by the reaction of some of the health-related talking heads that have dominated our media since March. They cannot appear to accept that the decision taken by Government on Friday has any justification, and they are promising us very rough times early in the new year. Perhaps these dire predictions will come to pass, but rational thinkers would have to accept that Government did not have much choice, if viewed in the context of livelihoods, mental health, and business survival. Another four or five weeks of lockdown would have resulted in a type of anarchy from many young people in particular. It is the right decision to open many businesses in as safe and controlled way as possible, while recognising there is nothing risk free.

A quick perusal of the most up to date labour market statistics is a sobering experience. On 23rd November, 352,078 people were in receipt of the Pandemic Unemployment Payment (PUP). Of this total, over 16 per cent are from the retail sector, and over 29 per cent are from the accommodation and food services sector. In total, these two sectors account for over 160,000 people. In addition, over one quarter of total PUP recipients are under the age of 25. Not alone has our younger generation suffered disproportionately on the labour market front, they have also had the potentially most exciting time of their lives put on hold, by health policymakers. This situation cannot be sustained.

Between the PUP, the Live Register and the Employment Wage Subsidy Scheme, over 900,000 workers have been in receipt of some form of welfare payment during Level 5. These dire labour market issues, their associated fiscal cost, and their impact on the mental health of the nation were instrumental in the Government decision to stand up to the scorched earth policy recommended by NPHET. The Minister for Finance has estimated that remaining at Level 5 for December would have cost a further €1 billion. Of course, the various tax revenues that would have been foregone through VAT etc, would increase this cost considerably.

Opening up is a risky strategy from a health perspective, but I sense that sticking with Level 5 would actually have given rise to behaviours that could have turned out to be riskier than the path that is being chosen.

As the economy is being re-opened, Brexit is of course grinding slowly towards some sort of conclusion, but we are not yet sure what the nature of that conclusion will be. Deal or no deal, we are heading towards some variation of a hard Brexit that will fundamentally alter how we do business with the UK. There is not a lot we can do about that. The UK is on the brink of making a once in a generation mistake of monumental proportions. We will have to adapt to the new scenario and make sure we manage the downside and be prepared to exploit as fully as possible the opportunities that will be presented. We have no choice.

BUDGET 2021

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BUDGET 2021

 

THE ECONOMIC BACKGROUND

Budget 2021 is all about COVID-19, housing, health, Brexit, and climate change. It marks the third part of a fiscal trilogy that included the pandemic employment package announced in March, and the July stimulus package. In some respects, framing this budget was very challenging, given the dramatic impact of COVID-19 on the economy and the public finances A record contraction of 6.1% in GDP in the second quarter contextualises the challenge. On the other hand, framing it was relatively straightforward, because there was no choice other than to spend and borrow aggressively, just like almost every other country in the world, and in an environment of engineered historically low bond yields.

Many sectors of the economy were forced to close in March and economic activity contracted sharply in those sectors. As the economy gradually re-opened over the summer months, activity in most sectors has recovered. However, activity levels have been constrained by the various COVID-19 protocols and restrictions in place, not least the localised lockdowns, and more recently the national move to Level 3 restrictions. This is likely to represent the future until it becomes possible to treat the virus, or a safe and effective vaccine is delivered.

The labour market has been the most noteworthy economic casualty of COVID-19. Coming in to 2020, there was concern about the challenges posed by an economy approaching full employment. These concerns have been replaced by very different and much more worrying ones since the beginning of March.

In the year to the end of June, total employment declined by 77,500 or 3.4% to 2.22 million. The greatest rate of decrease was in accommodation and food services (29.6% or 53,600); administration and support services (17.2% or 18,900); construction (12.1% or 17,800); and the wholesale & retail sector (5.2% or 15,600).

 

At the end of September, the seasonally adjusted unemployment rate, as measured in the standard way, stood at 5.4% of the labour force, or 126,200 people. This represents an increase of 9,200 over the past 12 months. However, if all of those in receipt of the Pandemic Unemployment Payment (PUP) were classified as unemployed, the adjusted unemployment rate would have stood at 14.7% of the labour force at the end of September. This is down from a rate of 24.5% in June.

 

In the week to 13th October, 228,858 people were on the COVID-19 Pandemic Unemployment Payment scheme. This is 369,142 lower than 5th May, but it increased by 23,265 over the previous week as the Level 3 restrictions started to impact. Table 1 shows the breakdown by sector of those in receipt of the PUP payment and clearly shows those sectors that have been most adversely affected by the health crisis. Accommodation & Food Services, and Wholesale & Retail Trade account for 43.7% of the total numbers in receipt of the PUP.  47.1% of those in receipt of PUP on 13th October were under the age of 34.

Table 1: Sector Breakdown of Pandemic Unemployment Payment (13th October)

SECTOR NUMBER % OF TOTAL
Agriculture, Forestry, Fishing, Mining & Quarrying 2,802 1.2%
Manufacturing 11,417 5.0%
Electricity, Gas, Water & Sewage 842 0.4%
Construction 15,538 6.8%
Wholesale & Retail Trade 30,500 13.3%
Transportation & Storage 7,466 3.3%
Accommodation & Food Services 69,535 30.4%
ICT 6,202 2.7%
Financial & Insurance Activities 5,275 2.3%
Real Estate Activities 3,567 1.6%
Professional, Scientific & Technical Services 10,599 4.6%
Administration & Support Services 22,640 10.0%
Public Administration & Defence 3,996 1.7%
Education 8,484 3.7%
Human Health & Social Work 7,751 3.4%
Arts, Entertainment & Recreation 7,042 3.1%
Other Sectors 9,299 4.1%
Unclassified 5,893 2.4%
Total 228,858 100.0%

Source: Department of Employment & Social Affairs, 6th October 2020.

FISCAL BACKGROUND TO BUDGET 2021

The fiscal challenges informing Budget 2021 are challenging. In 2019, the General Government surplus was equivalent to around 0.4% of GDP or €1.3 billion. Following the response seen to date by Government and the slowdown in economic activity, a deficit of €21.2 billion (6.1% of GDP) is now targeted for 2020.

In the first 9 months of 2020, the Exchequer ran a deficit of €9.37 billion, compared to a surplus of €38 million in the same period in 2019. The ongoing COVID-19 crisis is undermining tax revenues to some extent, but the pressure on public expenditure is very intense.

Total net voted government expenditure at €48.1 billion in the first 9 months of the year was 24.9% higher than in 2019. Current expenditure was 25.9% higher, and capital expenditure was 16.9% higher. Net voted expenditure in the Department of Employment Affairs and Social Protection was 76.9% higher than last year at €14 billion; and the Department of Health was 15.6% higher at €14.5 billion. These 2 departments accounted for 59.3% of total spending in the first 9 months of the year.

In the month of September, total tax revenues at €5.3 billion were €411 million or 7.2% lower than September 2019. Income tax was down by 7.7%; VAT was down by 14%; and corporation tax was up by 8.9%.

Overall tax revenues were 3% lower than the first 9 months of 2019. Income tax receipts were 2.1% lower; corporation tax receipts were 27.9% ahead; and VAT receipts were 19.9% lower. The weakness in VAT receipts reflects weaker consumer spending as a result of the lockdown. The relatively strong performance of income tax once again reflects the fact that lower paid workers who pay little tax, continue to be the main labour force casualties of COVID-19. For workers in FDI companies, financial services, professional services, and the public sector, earnings and employment are being sustained.

Table 2: Tax Revenues (January-Sept 2020)

HEADING € (M) % OF TOTAL YEAR-ON-YEAR (%)
Income Tax 15,429 39.0% -2.1%
VAT 9,868 24.9% -19.9%
Corporation Tax 7,469 18.9% +27.9%
Excise 3,794 9.6% -13.1%
Stamps 935 2.4% +3.2%
Capital Gains Tax 299 0.8% +1.8%
Capital Acquisitions 192 0.5% -4.6%
Customs 185 0.5% -26.4%
Motor Tax 732 1.8% -3.5%
Other 665 1.6% N/A
Total 39,568 100.0% -3.0%

Source: Department of Finance, Fiscal Monitor, September 2020.

On the expenditure side, net voted government expenditure to the end of September was €7.5 billion higher than expected and €9.5 billion or 28% higher than the first 9 months of 2019.

In the circumstances, a deficit of €21 billion for the full year is justifiable and unavoidable, as it is necessary to support the economy, business, and ultimately employment in the face of an unprecedented and totally unexpected economic shock. Such support will also be required in 2021.

It is clear that the economic, social and political imperative is to get as many people back to work as quickly and as sustainably as possible. In this context, it is essential that a longer-term perspective will be the key theme in Budget 2021 and the National Economic Plan.

 

 

 

 

 

 

 

 

THE DEPARTMENT OF FINANCE BUDGETARY ASSUMPTIONS

The economic assumptions underlying Budget 2021 are based on 2 assumptions. Firstly, from the beginning of 2021, bi-lateral trade with the UK will be conducted on the basis of World Trade Organisation (WTO) terms, which is estimated to knock 3% off GDP growth in 2021; and secondly, a widespread vaccine will not be available in 2021.

  • GDP is projected to fall by 2.4% in 2020 and to grow by 1.7% in 2021.The decline in 2020 is not as large as previously forecast, due mainly to the strong contribution of the multi-national sector, but the impact on the domestic economy has been severe. The recovery in 2021 is projected to be significantly weaker than previously forecast, because of the assumptions relating to Brexit and COVID-19.
  • Modified domestic demand, which is a better proxy for the domestic economy is set to fall by 6.1% in 2020, and to expand by just 4.9% in 2021. Consumer spending is forecast to decline by 7.5% in 2020, and to expand by 7% in 2021.
  • Employment is set to fall by 13.7% in 2020, and the unemployment rate is set to average 15.9% of the labour force. Employment is set to grow by 7.6% in 2021, and the unemployment rate is set to average 10.3% of the labour force.
  • The forecasts for 2020 could deteriorate, depending on how COVID measures evolve in the final quarter of the year. The overall risks to growth in 2021 are still very significant.

Table 3: Macro-Economic Forecasts Underlying Budget 2021

  2019 2020f 2021f
GDP 5.5% -2.4% 1.7%
Modified Gross National Income 7.6% -5.1% 2.7%
Modified Domestic Demand 3.3% -6.1% 4.9%
Consumer Expenditure 2.8% -7.5% 7.0%
Exports 10.5% 1.9% 1.0%
Employment 2.9% -13.7% 7.6%
Unemployment Rate 5.0% 15.9% 10.3%

Source: Department of Finance

The key strategy in Budget 2021 is:

  • Budget 2021 is focused on providing further support to the economy.
  • Decisions prioritising management of the COVID crisis and Brexit.
  • Significant measures are targeted at the three priorities in the Programme for Government – health, housing, and climate change.
  • The Budget is based on the assumptions of a disorderly Brexit and no vaccine in 2021.
  • There are no broad-based increases in income taxation.
  • Budget 2021 is targeting a modest improvement in the headline fiscal position, while allowing deficit-financed spending to continue in the short-term.

KEY ELEMENTS OF BUDGET 2021

Budget 2021 is the most expansionary budgetary package introduced in the history of the state. In the face of the pandemic, fiscal policy is justifiably strongly counter-cyclical. There is no other choice. The tax measures and the very significant increase in public expenditure contained in the budget are aimed at sustaining businesses and households that are in serious difficulty due to the evolving restrictive measures put in place to deal with the virus. There is no option other than to increase spending significantly in the Department of Employment Affairs and Social Protection, and the Department of Health.

In an environment where long-term bond yields are close to zero as a result of the bond buying programme of the ECB, and the relaxation of the EU’s fiscal rules, the Irish Government is correct in borrowing heavily to sustain the Irish economy and Irish society for as long as it takes.

The appropriate response to the health crisis is to ensure that a functioning economy is maintained, and when growth resumes, that will result in a cyclical reduction in government borrowing and debt. Fiscal austerity would not be an appropriate response from a social or economic perspective in the face of the COVID crisis.

Before any changes to taxation or expenditure in Budget 2021, the Department was projecting a general government deficit of €21.2 billion in 2020, equivalent to 6.1% of GDP; and €14 billion in 2021, equivalent to 4% of GDP. Following the changes announced in the budget, a deficit of €21.5 is now forecast for 2020 (6.2% of GDP) and €20.5 billion (5.7% of GDP) in 2021.

The budget package is worth €17.7 billion, that includes €3.5 billion in core current expenditure; €1.5 billion in capital expenditure, which at €10.1 billion is the largest ever capital programme; €3.5 billion is being set aside for a Recovery Fund; and there is a tax package of €270 million net.

Overall tax revenues are forecast to increase by 6.5% in 2021 to reach a record high of €60.4 billion.

 

 

 

 

 

Table 4: Tax Revenue Projections Post-Budget 2021

TAX HEADING 2019 2020f 2021f % 2021/2020
Customs 348 265 N/A N/A
Excise Duty 5,940 5,515 N/A N/A
Capital Gains Tax 1,075 935 N/A N/A
Capital Acquisitions Tax 533 450 N/A N/A
Stamp Duties 1,515 1,920 N/a N/A
Income Tax 22,934 21,557 N/A N/A
Corporation Tax 10,888 12,475 N/A N/A
Value-Added Tax 15,118 12,800 N/A N/A
Motor tax 962 929 N/A N/A
Total 59,314 56,695 60,390 +6.5 %

Source: Department of Finance

 

The key measures included in Budget 2021 included:

  • A General Government Deficit of €21.5 billion is pencilled in for 2020, equivalent to 6.2% of GDP. Following the budget day changes to expenditure (+€17.4 billion expenditure measures, over and above the planned expenditure for 2020 pre-COVID; and €270 million in net tax changes), a deficit of €20.5 billion is projected for 2021, equivalent to 5.7% of GDP. The national debt is projected at €219 billion at end 2020, equivalent to 107.8% of Gross National Income, and 114.7% of Gross National Income at the end of 2021.
  • A Recovery Fund of €3.4 billion is being introduced. This will relate to infrastructure development, reskilling and retraining, and supporting investment and jobs. This fund will be related to COVID-19 and Brexit effects.
  • Gross Voted Capital Expenditure is projected to increase by 2.8% to €10.1 billion and Gross Voted Current Expenditure
  • Expenditure on health to increase by €4 billion.
  • The tax debt warehousing scheme is to be extended to include the 2019 balance and 2020 preliminary tax to allow such taxpayers to defer payment for a period of a year with no interest applying; 3% will apply thereafter and will attract no surcharge.
  • The EWSS will be extended beyond 31/3/21 to the end of the year. Changes may be made to it, depending on economic circumstances.
  • Multi-annual house building programme, with a significant allocation of funding to local authorities to provide social and affordable housing.
  • A COVID Restrictions Support Scheme (CRSS) will provide to closed or effectively closed business due to COVID-19 restrictions, a payment of up to €5,000 per week, based on their turnover in 2019.
  • The VAT rate for the Accommodation and Food Services sector has been cut from 13.5% to 9%, with effect from 1/11/20 and will expire on 31/12/21. The cut in the top rate of VAT from 23% to 21% that was introduced on 1st September will be allowed run out on 28th February as originally envisaged.
  • The enhanced Help-to-Buy Scheme is being extended beyond the planned year-end, to the end of 2021. This entitles first-time buyers buying a new house or apartment relief of up to €30,000.
  • No changes in PAYE, PPRSI or USC. However, tax bands and credits were left unchanged. Modest increase in the ceiling for the second USC threshold from €20,484 to €20,687 to prevent minimum wage workers from moving into higher USC band. The weekly threshold for the higher rate of employer’s PRSI increased from €394 to €398.
  • In Budget 2020, the carbon tax was increased by €6 per tonne to €26. In line with the Government’s climate targets, this is now being increased by €7.50 per tonne, for motor fuel from midnight on night of Budget, and for other fuels from 1st May 2021. This will lead to a €1.47 increase in the cost of a 60-litre fill of diesel and €1.28 for a similar amount of petrol, as well as add 90-cent to a bag of coal and 20 cent to a bale of peat briquettes. An increase in the Fuel Allowance of €3.50 per week is being introduced to help offset the carbon tax among vulnerable groups and the low paid.
  • The Earned Income Tax Credit for self-employed has been increased by €150 to €1,650, to bring it into line with PAYE employees.
  • Changes to Vehicle Registration Tax, to disincentivise people from buying higher emission vehicles.
  • Rise in pension age to 67 on 1/1/21 scrapped.
  • A significant budget package is being introduced for the entertainment and arts sectors.
  • The commercial rates waiver has been extended to the end of the year.

In overall terms, Budget 2021 is a very expansionary and counter-cyclical budget that is totally dominated by the COVID-19 crisis, and the possibility of a no-deal Brexit. It is an appropriate strategy in current circumstances, but this is an evolving situation and clearly Government will have to remain very hands on in terms of management of the economy for at least the next 15 months.

THIS APPEARED IN IRISH EXAMINER OCTOBER 14th 2020 BUDGET 2021

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A STRONG COUNTER-CYCLICAL BUDGET TOTALLY APPROPRIATE

In Budget 2020, Paschal Donohue adopted a pretty conservative approach to the public finances despite the fact that it was the last budget before the general election. In the aftermath of that election in February, I heard a number of bruised and battered Fine Gael voters lament and even criticise his approach, but I think history has already shown that he adopted the correct one. A year ago, the economy was growing strongly and a budget surplus, albeit a small one, was most appropriate in the circumstances. Fiscal policy should be counter-cyclical if at all possible, and 2019 certainly was not a year for an injection of fiscal stimulus. On the contrary, 2020 and 2021 are most definitely years for a strong injection of fiscal stimulus and that is exactly what we were treated to yesterday. Budget 2021 is an example of a sensible and most appropriate counter-cyclical fiscal strategy.

The run up to Budget 2021 was challenging and unusual. The challenges emanated from the ongoing havoc that COVID-19 is wreaking on the economy and the public finances; and the very real threat that Brexit now poses. Unusually, yesterday’s budget offering was the third part of the ‘2020 fiscal trilogy’. In March, there was a significant fiscal stimulus in the shape of the various COVID-related employment supports, and then the July stimulus package. It is unlikely that a fourth one will be required in 2020, but that may not be the case in 2021.

Budget 2021 was sensibly predicated on two assumptions – namely, that from the beginning of 2021, bi-lateral trade with the UK will be conducted on the basis of World Trade Organisation (WTO) terms; and secondly, a widespread vaccine will not be available. Both of these assumptions are credible based on what we currently understand, but of course both could turn out better than expected. Given just how influential both of these issues will be for the trajectory of the economy and the public finances over the next couple of years, it is sensible and prudent to plan for the worst and hope for the best.

Budget 2021 is the most expansionary budgetary package introduced in the history of the state, totalling €17.7 billion. Unlike Irish fiscal policy in my living memory, this year’s budget is sensibly very counter-cyclical, and it stands out in marked contrast to policy in the aftermath of the banking crash over a decade ago.

The Government is set to run a budget deficit of around €21.6 billion this year, and following the spending and taxation measures announced yesterday, a deficit of around €20.5 billion is projected for 2021. These are big borrowing numbers that will add significantly to the level of outstanding national debt. However, in the face of the pandemic, there is no other choice. The tax measures and the very significant increase in public expenditure contained in the budget are aimed at sustaining businesses and households that are in serious difficulty due to the evolving restrictive measures put in place to deal with the virus. There is no option other than to increase spending significantly in the Department of Employment Affairs and Social Protection, and the Department of Health in particular. There is also no option other than to use taxation and expenditure to support those sectors and those households most adversely affected by the crisis, and the potential pressures that could emanate from a bad Brexit.

In an environment where long-term bond yields are close to zero as a result of the bond buying programme of the ECB; where the EU has relaxed its fiscal rules; and where the International Monetary Fund (IMF) is strongly advocating capital spending and investment in infrastructure, the Irish Government is correct in borrowing heavily to sustain the Irish economy and Irish society for as long as it takes. Thankfully, bond markets are not overly concerned, because virtually every country in the world is doing what Ireland is doing.

The appropriate response to the COVID crisis is to ensure that a functioning economy is maintained, and that the foundations for an eventual economic recovery are laid. A resumption of economic growth would result in a cyclical reduction in government borrowing and debt, so it is important to ensure that we do whatever it takes to guarantee such an economic recovery. In the face of or indeed in the aftermath of this crisis, fiscal austerity would not be an appropriate response from a social or economic perspective. Of course, it goes without saying that Government does need to be vigilant in terms of how the money is spent, because history should show us that merely throwing money at a problem does not necessarily solve it. It is also important to remember that much of the money spent will find its way back into the economy through wages and consumer spending, and thereby support employment and tax revenue buoyancy.

The economic assumptions underlying the budget look sensible and appropriate based on what we know now, but the level of uncertainty is currently elevated to a degree that we have never seen before. Anything is still possible over the coming months, and the good thing is that there is a level of flexibility built in that will allow Government respond to whatever might arise. The already very pressurised motor industry will justifiably have most to complain about after this budget, but for all other sectors it looks reasonable, if one accepts that scarce resources must be allocated in the best manner possible.

Budget 2021 is all about COVID-19, Brexit, housing, health, and the climate. In overall terms, Budget 2021 is a very expansionary and counter-cyclical budget that is totally dominated by the COVID-19 crisis, and the possibility of a no-deal Brexit. It is an appropriate strategy in current circumstances, but this is an evolving situation and clearly Government will have to remain very hands on in terms of management of the economy for at least the next 15 months.

 

US PRESIDENTIAL ELECTION NOV 2020 WRITTEN NOV 8th 2020

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ASSESSMENT OF US PRESIDENTIAL ELECTION 2020

 

Election 2020 possibly the most important in generations…

It is generally accepted that US Election 2020 is possibly the most crucial presidential election in generations, if not in US history. In 2016, Donald Trump upset the odds and came to power without any real political pedigree. During his tenure, he has been extremely divisive and has exposed and exploited the very real divisions in US society. He also adopted a very confrontational approach to international relations and had a very fractious relationship with former international friends and allies of the US. He pushed a strong nationalistic, inward looking agenda, and arguably did serious damage to the US’ longstanding status as leader of the free world.

He tapped into something in the US, and delivered what his supporters wanted him to deliver, as evidenced by the fact that he garnered considerably more votes in 2020 than in 2016, and he was only narrowly defeated. If President Trump had been re-elected, the possibility is that free from the shackles of election, Trump would have thrown caution to the wind in his second term and really move to push the various agendas that dominated his first term. This would not have been good for global trade, global growth, or global political stability. It may have been good for the US economy, but would have further increased divisions in the US, and further damaged the international political order. A Trump victory would also have given further belief to the nationalistic leaders and movements that are being nurtured around the world.

The election of Biden may not result in the reversal of these trends, but perhaps it might just slow some of them down. It is also important to bear in mind that Biden won narrowly, and on 20th January next he will take over a very divide and fractured country.

Trump leaves a mixed legacy…

Somewhat unusually for a politician, President Trump delivered a considerable amount of what he promised to deliver. He has cut corporation and incomes taxes; he cut red tape for business; he has clamped down on immigration and some of the ‘wall’ has been constructed; he has taken on China in an aggressive manner; and he has sought to re-negotiate or pull out of trade deals. He also packed the Supreme Court with conservative judges. On the other hand, he has failed to resolve the healthcare crisis; he has failed to rein in the US trade deficit; and the national debt has widened dramatically during his presidency, not helped of course by COVID-19. This health crisis exposed the real lack of a social safety net in the US, and the need for massive investment in infrastructure.

Trump was basically anti-free trade and anti-globalisation and did not believe in multilateralism. He took the US out of the Paris Climate Accord, and is in the process of taking it out of the WHO. The UN and NATO could have been next.

In terms of his management of the economy, arguably President trump presided over a relatively good period for the economy, at least until COVID-19 struck. In 2017, GDP expanded by 2.2%; in 2018 by 3.2%; and in 2019 by 2.3%. This year GDP growth is forecast to decline by 4.3%, and to expand by 3.1% in 2021. Without COVID-19, GDP would have been expected to grow by around 3% this year. COVID-19 has certainly taken the gloss off his economic legacy, but his handling of the crisis has not been good. Of course, he is not unique in that respect.

In the third quarter of 2020, the seasonally adjusted annualised growth rate expanded by a massive 33.1%. President Trump latched on to this number in the final days leading up to the election. This annualised growth number is basically calculated by raising the quarterly growth rate to the power of 4. Q3 growth was obviously exaggerated by a rebound from a very weak Q2 as a result of COVID. The reality is that growth in the third quarter was 2.9% lower than a year earlier, and was 3.5% lower than the final quarter of 2019.

The labour market performance under Trump was strong, at least until 2020. At the end of 2019, the unemployment rate was down at a historic low of 3.5% of the labour force. This jumped to 14.7% in April, and gradually declined thereafter to 7.9% in September. Total employment in September was still 10.4 million jobs lower than in February.

President Trump was good for the US economy, and despite the damage inflicted by COVID-19, his strong vote and ultimately narrow defeat were largely due to his economic management. The exit polls showed that the economy was the most important issue for many voters, and Trump was seen as a good choice by a large segment of the electorate.

President Trump was good for the equity markets. The cut in the corporation tax rate from 35% to 21% boosted corporate profits and share buybacks. The domestic economic performance was also quite good. Between 1st January 2017 and polling day on 3rd November 2020, the S&P 500 gained 49.1%. The gains would likely have been considerably higher but for COVID-19.

What might we expect from a Biden Presidency…?

The new President Elect, Joe Biden, who is now 77 and will be 78 by the time of the inauguration on 20th January, came in to this election with a long and experienced, albeit not particularly strong, political pedigree.

President Trump argued during the campaign that Biden would succumb to the wishes of the left and dramatically expand the role of government and do untold damage to business. This is somewhat ironic, as Trump has overseen a massive increase in Government involvement in the economy since COVID hit.

These accusations about Biden are not likely to materialise. Biden has been a centrist all of his political career and is not likely to radically shake up the economic or political landscape. It would not be in his nature. His Vice-President Kamala Harris on the other hand, would possibly be more radical if she were to assume the presidency for some reason.

The big question now is what we can expect from a Biden presidency. The platform on which he built his 2020 election campaign was titled ‘Build Back Better’. This basically revolves around fostering economic recovery; improving infrastructure; bringing broader benefits to lower income communities and minorities; improving education, R&D, and the skills of the workforce; and creating a greener economy and society.

This overall agenda is set to include some of the following:

  • A €2 trillion investment in Green Energy to radically cut carbon emissions. This would be bad for the oil industry and fracking and would fly in the face of Trump’s environmental policies over the past 4 years. From a global perspective this would be good, and he will probably also re-engage with the Paris Climate accord.
  • A significant increase in long-term infrastructure investment, which would have a significant fiscal multiplier effect. This would start to correct for years of under-investment in infrastructure. This expenditure would be funded by tax increases, with his tax changes targeted to raise $1.4 trillion over his 4-year term.
  • His tax policies include an increase in the corporation tax rate from 21% to 28%; higher income taxes for those earning over $400,000; and higher capital gains taxes for the very wealthy.
  • An increase in the Federal Minimum Wage from $7.25 per hour to $15 per hour.
  • More support for small business, through grants and other mechanisms.
  • Universal pre-school education; tax credits for childcare; and free public university education for families who earn less than $125,000 per annum.
  • He seems to believe in a soft form of protectionism. This could involve bringing supply chains back home by adopting a ‘made in America’ government procurement policy; tightening of the rules on labelling of products; and the use of US steel for transport projects.
  • He would likely promote multilateralism and seek to rebuild the damaged relationship with the EU and other countries. However, give the popular support for Trump’s approach to China, he is unlikely to row back significantly on the tariff regime with China, or indeed the fractious relationship between the US and China that gathered momentum during Trump’s presidency. However, Biden is an internationalist, and hopefully he will seek to rebuild the damage done to US international relations over the past 4 years. This would be good for global trade, global growth, and perhaps global political stability.
  • He would likely adopt a more constructive approach towards immigration, although he will have to be mindful of the popular support for some of Trump’s approach to immigration.

What might it mean for equity markets?

The aforementioned agenda does not look radical, and in fact looks very sensible from an economic and societal perspective. If implemented, this agenda should be good for the US and indeed the global economy. Traditionally, equity markets have tended to perform better during Democrat presidencies. It may not be as clear cut this time, given the elevated level of US equities.

It is estimated that the proposed corporation tax changes could trim S&P earnings by 9%, which would not on the face of it be good for equity markets. However, the investment programme in infrastructure, the Green economy agenda, and some of the other policies should benefit growth in the economy, and consequently, be good for equity markets.

There is some speculation that anti-trust laws could be used to address the tech sector. However desirable this might be, the markets would most likely not like it. Time will tell.

Biden will not find it easy…

For President-Elect Biden, the implementation of his agenda will not be straightforward.

The US is set to run a budget deficit of close to 16% of GDP this year, and the national debt is at record highs, equivalent to 106% of GDP. On the current trajectory it could hit 200% of GDP by 2050. The need for fiscal constraint could become a strong political pressure point over the coming years.

In addition, without control of both houses, the power of any president is seriously curtailed.

The Outgoing House of Representatives (435 seats) was controlled by the Democratic party. The Democrats had 232 seats; the Republicans had 197 seats; 1 Libertarian; and 5 vacant seats. 218 seats are required for a majority. The Democrats have maintained control of the House.

The Senate is controlled by the Republican party, who have a majority of 6. There are 100 seats in the Senate. The Republicans have 53; the Democrats have 45; and there are 2 Independents. Despite high hopes in the Democratic party, it appears likely that the Republicans will maintained control of the Senate, subject to runoffs in January.

The House of Representatives and the Senate are equal partners in the legislative process. Legislation cannot be enacted without consent of both chambers. The division of Congress will make it difficult for Biden to pursue his agenda, but this is the norm rather than the exception in US political life.

The Supreme Court is also controlled by conservatives, which will make it more challenging for a Democratic president. Perhaps the biggest issue of all for Biden is the fact that Election 2020 has really highlighted just how dangerously divided the US is.

For Ireland…

Arguably, a Biden victory would be better for Ireland than another 4 years of President Trump.

  • If the corporation tax rate is increased from 21% to 28%, this will make Ireland even more attractive for US multi-national investment. Given that post-Brexit, Ireland will be the only English-speaking country in the EU (excepting tiny Malta), so it could benefit from Biden’s tax policies.
  • Biden will likely engage more constructively with the EU, which would be good for bilateral trade, which would be good for the small, open, Irish economy.
  • In the context of Brexit, Biden would be better for Ireland. The speaker of the House, Nancy Pelosi, has said that the House would not ratify a UK-US trade deal, if the UK exit from the EU undermines the Northern Ireland peace process. Biden agrees with this perspective.

Biden also has Irish heritage, so his general approach to Ireland is likely to be warm and positive.