In Focus: America’s TCJA

As the US election continues to heat up, one issue that will continue to be highly salient surrounds the TCJA.

The Tax Cuts and Jobs Act of 2017 was pretty well the largest change to the tax code in decades, reducing taxes for tens of millions of households and business across the US economy.

Such was the scale of the tax cuts, it was nicknamed by some as the ‘Cut Cut Cut Act’ and passed the Senate 51-48 and House 224-201.

While proponents argued that it would simplify taxation, attract investment, incentivise growth and increase wages, those in opposition maintained that it would raise inequality, put huge strains on the budget deficit and adversely impact healthcare.

For example, its estimated that the top 20% of the highest income households received 65% of the tax savings.

The cuts brought about from the TCJA covering individuals and smaller business, however, is set to expire at the end of next year.

According to the Congressional Budget Office, extending all cuts for another decade would cost some $3.5 trillion, eating ever further into the US’s gargantuan public debt. For example, extending the TCJA alone would amount to the public deficit being around 1 to 1.5% of GDP higher per year.

Given the inflationary impact of such fiscal loosening, any extension of the TCJA could therefore have a far-reaching impact on the wider economy, and monetary policy.

According to some analysts, the chances of the TCJA being extended appears greater under a Republican Presidency where Republicans control the Senate and House. Whereas a divided Congress would most likely lead to fiscal tightening. Meanwhile, some see the chances of the Democrats extending the TCJA as fairly strong however, the party may consider some fiscal tightening to offset its implications on the budget deficit.

Hence, as the race for the White House continues, it’s likely that we may hear more about TCJA from both parties and both presidential candidates across the pond.

Data from the ONS this morning indicated that the UK’s unemployment rate rose 10bps to 4.4% in the three months to April, marginally higher than market expectations. This marks the highest rate of unemployment since September 2021, and a considerable rise from December’s recent lows of 3.8%.

The rise in unemployment came as the number of unemployed persons increased by 24,000, indicating that the total number of unemployed has risen to 1.51m.

The number of those in work however increased over the period too, rising 30,000 to 33 million.

UK wage growth excluding bonuses came in at 6% (annualised) in the three months to April 2024, coming in line with the previous month’s print and in line with market expectations.

When looking at wage growth including bonuses, the data surpassed expectations coming in at 5.9% against a consensus which was pointing to 5.7%. This follows last month’s print which similarly showed wage growth including bonuses coming in higher than expectation.

As policy makers look towards the next monetary policy committee on the 20 June, Threadneedle Street will be keen to monitor the inflationary pressures being driven from by labour market as they seek to bring inflation down to their 2% target.

Presently, money markets are implying are that there is less than a 6% chance of a rate cut in June more or less unchanged before the print. However, when looking further down the line, markets are now implying that there is around a 40% chance of 25bps rate cut by August. This has been upwardly revised from around a 30% chance being priced in yesterday, indicative of how the slowdown in the labour market (notwithstanding a beat on wage growth including bonuses), may influence some in the BoE to want to loosen monetary policy more quickly.