Shadow boxing
As we enter the final stages of the US presidential election, 10 September represents a key milestone for the two candidates who will take each other on for the first time in a televised debate. Riding high on a wave of optimism since the announcement of Joe Biden’s withdrawal, Kamala Harris – now ahead in the polls with 47% versus 44% for Donald Trump[1] – will need to avoid any missteps that would lose her the lead. Meanwhile the Republican candidate will attempt to take back control after victory had seemed to be in the bag whilst Joe Biden was still in the race.
This first confrontation is also an opportunity to analyse the programmes of the two candidates and, more importantly, to assess their impact on the economy and the knock-on effect for financial markets.
The prestigious Wharton School of the University of Pennsylvania recently undertook this exercise from which we can draw a number of major conclusions. In terms of the impact on growth compared with current legislation, the researchers estimate that Kamala Harris’s programme would have a significantly negative short, medium and long-term impact, whilst Donald Trump’s programme would have a positive short-term impact and a much lower negative medium and long-term effect.
In contrast, the programme of the former President, Trump, will be much more costly for US finances than that of the current Vice President. The study indicates that the measures announced by Donald Trump to raise import tariffs have not been taken into account in the calculation, as the terms of any such measures are insufficiently clear, as are the potential secondary impacts, in particular, any retaliatory measures that may be taken by affected countries. However, there is little likelihood that this part of the Trump programme will be able to offset the considerable gap between the increase in the deficit estimated by the Wharton School for the two candidates – an additional USD 5,800 billion by 2034 for the Trump programme versus USD 1,200 billion for the Harris programme.
Ultimately, the difference between the two programmes can be summed up as a duel between better short-term growth and greater long-term budgetary sustainability. Whilst economists will certainly prefer the latter, financial markets tend to focus much more on the short term. All the more so since Kamala Harris’s programme includes a number of measures detrimental to companies: an increase in corporation tax from 21% to 28%; an increase in the tax rate for foreign earnings from 10.5% to 21%; and a quadrupling from 1% to 4% for the tax on share buybacks. All of these initiatives are likely to get a frosty reception from US equity markets.
However, a victory for Kamala Harris in the presidential election would not necessarily mean the swift and automatic application of these various measures. In reality, everything will depend on the composition of Congress, since it alone can ratify legislative changes, with the exception of measures related to foreign policy – including customs tariffs – which remain the domain of the President. A Congress under Republican control – as was the case when Bill Clinton was re-elected in 1996 – or simply a split Congress, would significantly restrict Kamala Harris’s room for manoeuvre if elected. In particular, the rise in corporation tax is likely to be a red line for the Republican camp.
Overall, the debate on 10 September will probably have a significant impact on the outcome of the presidential election. But it will provide no indication of the economic programme that will actually be implemented in the US in the early months of 2025. With greater reason, if the economy, and employment in particular, continue to deteriorate and the US sees a sharp slowdown or recession, it’s a strong bet that the measures applied will have little in common with those proposed by either of the candidates for the White House.
Final version of 4 September 2024 – Enguerrand Artaz, Fund Manager, LFDE