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Economists don’t buy Trump’s 3 percent GDP growth target

  • Most U.S. business economists are counting on Congress and the White House to cut individual and corporate taxes by next year, according to a NABE survey.
  • They also doubt the economy will grow as fast as President Trump and some Senate Republicans are counting on to help pay for proposed cuts in tax rates.
President Donald Trump
Kevin Lamarque | Reuters
President Donald Trump

Most U.S. business economists are counting on Congress and the White House to cut individual and corporate taxes by next year, according to a survey released Monday.

But the survey also found that they doubt the economy will grow as fast as President Donald Trump and some Senate Republicans are counting on to help pay for proposed cuts in tax rates.

According to the survey from the National Association for Business Economics, most of those polled expect the growth of U.S. gross domestic product to level off next year at an annual pace of about 2.3 percent. That's down from the latest reading of 3 percent growth in the second quarter of this year.

Trump has touted the 3 percent growth target as a cornerstone of the administration's economic plan.

"If we achieve sustained 3 percent growth that means 12 million new jobs and $10 trillion of new economic activity. That's some number," Trump said during a speech last month in Missouri promoting tax reform. "I happen to be one that thinks we can go much higher than 3 percent. There's no reason we shouldn't."

Most economists expect Congress to send a tax reform package to the White House by next year, according to the latest survey from NABE, which questioned some 2,500 economists from large businesses, financial firms, trade groups, academic institutions and consulting firms.

But Trump's 3 percent growth target is unrealistic, according to the NABE survey. Respondents expect that, after slowing through the rest of this year, GDP growth will level off next year, with inflation gradually rising to 2 percent and the unemployment rate falling to 4.1 percent by the end of 2018.

The survey was conducted during the period when Hurricane Harvey produced extensive damage to the Houston area, and before Hurricane Irma made landfall in Florida.

The Trump administration's 3 percent growth target is more than just a campaign aspiration. Last week, Senate Republicans said they were closing in on a compromise tax reform package that could cut revenues by as much as $2 trillion over the next 10 years.

To satisfy deficit hawks, who are loathe to add to the nation's $20 trillion debt, proponents of the plan are counting on faster economic growth to make up for the revenue shortfall from cutting individual and corporate tax rates.

Much of the debate over any tax reform plan will rest on models used to generate estimates of the long-term costs to the government and impact on the economy. Central to the issue is a process known as "dynamic scoring," which attempts to estimate the impact of tax cuts on economic growth, and then capture that impact in the overall revenue forecast.

That means the method used to estimate the revenue and economic impact will be critical to the political success of any plan. But unless the economy achieves the hoped-for 3 percent growth, it's unlikely that tax cuts will produce enough revenue to avoid creating additional federal debt.

In addition to tax reform, the economists are expecting Congress and the White House to enact by next year a package of infrastructure spending, a proposal that won bipartisan support in last year's election but has seen little progress on Capitol Hill.

About a third of the group thinks the renegotiation of the North American Free Trade Agreement would produce at least a marginal net benefit to the U.S. economy, while 27 percent said it will have a negative net impact, and 30 percent said it would have no impact.

In general, the group continues to believe that a recession is unlikely in the next two years, with the majority putting the probability of recession this year or next at 25 percent or less. They ranked the top three downside risks to the economy as trade protectionism, a substantial stock market decline and immigration restrictions.

The top three factors that could produce better-than-expected U.S. economic growth were stronger global growth, corporate tax reform and individual income tax cuts.