U.S. Treasury Official Says Economists Lowballing Tax-Cut Impact

(Bloomberg) -- Economists are underestimating how rapidly the U.S. economy will grow from tax cuts that are encouraging companies to invest and create jobs, a senior Treasury official said.

“Despite the stock-market volatility, the economy is enjoying a period of relative strength and prosperity in both the United States and in many other countries,” said David Malpass, the Treasury Department’s undersecretary for international affairs, at an event in Washington on Wednesday. “Many forecasting models low-ball the longer-term growth effect of the new tax law by focusing on its fiscal mechanisms rather than the structural change.”

The “real growth effect” will come from “businesses, large and small, responding to improvements in growth policies,” he said.

The White House’s economic outlook in the 2019 budget proposals released Monday counts on a unlikely mix of faster growth, lower unemployment and tame inflation. The Trump administration sees inflation, based on the consumer price index, averaging 2.1 percent in 2018 and 2.3 percent over the long run, according to the assumptions. The economy is seen expanding 3.1 percent this year and 3.2 percent in 2019, following 2.5 percent in 2017.

Analysts surveyed by Bloomberg expect gross domestic product to climb 2.7 percent this year and 2.3 percent next, with inflation at 2.3 percent in 2018 and 2.2 percent in 2019.

U.S. financial markets were roiled recently by concerns that inflation is picking up, driven by a tightening labor market, which could lead the Fed to quicken the pace of interest rate increases. Investor worries deepened on Wednesday when January’s inflation data came in faster than expected. A combination of tax cuts and deficit spending backed by Congress is expected to stimulate the economy, adding more pressure on the inflation outlook.

©2018 Bloomberg L.P.