LONDON (Reuters) - The U.S. government pumped up the economy in 2018 by taxing less, spending more, especially on defence, and boosting borrowing, but it probably cannot repeat the same stimulus in 2019/2020.
As the fiscal stimulus from last year fades, economic growth is set to slow, especially in the manufacturing sector, which has been a major beneficiary from higher defence spending.
The federal government’s receipts from taxes, social security contributions, customs duties and other items fell by 0.4 percent in 2018, as reduced tax rates more than offset the impact of an expanding economy.
Federal revenues have recently been growing at some of the slowest rates outside recession periods in the last four decades (“Monthly Treasury Statement”, U.S. Bureau of the Fiscal Service, Feb. 13).
At the same time, government spending has continued rising at a rate close to its long-term average, with federal outlays increasing by more than 4.4 percent last year compared with 2017.
The result has been a massive fiscal stimulus in an economy already well advanced in the business cycle with unemployment at multi-decade lows and limited spare capacity.
Much of the extra spending has been directed towards the Department of Defense, where outlays jumped by almost 5.6 percent in the fiscal year to September 2018.
Within the military budget, a big part of the extra spending has gone on equipment, with procurement surging by 8.2 percent in fiscal 2018, up from a 1.4 percent increase in fiscal 2017 and 1.3 percent in fiscal 2016.
Much of the extra spending has been directed towards long-lived hardware rather than non-durable items, giving a massive boost to the defence industrial base.
U.S. manufacturers reported that new orders for defence capital goods grew at an annual rate over 20 percent in 2018, separate data published by the U.S. Census Bureau showed.
New orders for defence capital goods rose four times faster (23.7 percent) than new orders for non-defence capital goods (6.0 percent) last year, according to the Census Bureau.
The question is whether this rate of fiscal expansion is sustainable, and, if not, what will happen when the military spending boom slows.
The government recorded a deficit of $779 billion in fiscal 2018 (3.8 percent of GDP), according to the U.S. Congressional Budget Office (“Budget and economic outlook”, CBO, January 2019).
On current policies, the deficit is already projected to increase to $897 billion in fiscal 2019 (4.2 percent) and $1.1 trillion by fiscal 2022 (4.7 percent).
The scope for boosting the economy further by cutting taxes or increasing spending may therefore be more limited in future.
Higher government spending and lower tax payments made a major contribution to the rise in U.S. manufacturing activity last year, but the boost may not be repeatable in 2019 and 2020.
John Kemp is a Reuters market analyst. The views expressed are his own.
- Slowing U.S. economy can ill afford any more shocks (Reuters, Feb. 19)
- U.S. government’s borrowing binge poses global risks (Reuters, Nov. 8)
Editing by Dale Hudson