How would a Harris or Trump administration affect the US economy?

Federal deficit is expected to increase regardless of winner, but Trump's proposed tariffs could complicate inflation picture

US presidential candidates Kamala Harris and Donald Trump have been on the campaign trail in the past week laying out their agendas. AFP

US Vice President Kamala Harris is riding a wave of momentum after accepting the Democratic Party's nomination for president last week, but the economy remains the paramount issue in this year's race.

“This election, the outcome is going to be determined by how people vote with their wallets based on inflation,” Ryan Sweet, chief US economist at Oxford Economics, told reporters last week.

According to an ABC News/Washington Post/Ipsos poll, Ms Harris's Republican rival Donald Trump holds a nine-point lead when it comes to who Americans trust more to handle the economy and inflation. Meanwhile, a poll released by the Financial Times and the University of Michigan Ross School of Business showed the Democrat with a one-point advantage.

The election's outcome will have significant effects on the economy with the Federal Reserve's inflation battle still being fought and the expiration of Mr Trump's tax cuts next year that will be fiercely debated in Congress.

Both candidates have been on the campaign trail in the past week laying out their agendas – Ms Harris with an appearance last Friday in North Carolina, and Mr Trump with a speech in the battleground state of Pennsylvania on Monday.

Inflation and interest rates

The inflation scenario varies, with economists agreeing Mr Trump's protectionism and immigration policies will stall progress in restoring price stability.

Mr Trump has recently proposed a 10 per cent tariff on all US trading partners – as well as a 60 per cent tariff on Chinese goods – as a replacement to income taxes.

A recent paper from the Peterson Institute of International Economics said higher tariffs would harm US exports and diminish economic growth, while also leading to higher inflation. A separate study by the Lombard Odier Group predicts that a Trump presidency and a Republican-controlled Congress would also stall inflation, forcing the Federal Reserve to halt cutting interest rates at around 4 per cent.

“In the event of a Trump presidency with a divided Congress, the impact of tariffs would likely dominate, slowing growth while still increasing inflation,” the group wrote in its latest CIO Office Viewpoint.

The current target range for US interest rates is 5.25 to 5.50 per cent.

Bond yields would also probably rise, and so would the US dollar against the euro, the organisation said. The company expected a Harris-led presidency to have greater policy continuity should she succeed Mr Biden, with the Fed cutting rates through mid-2025.

Changes to the Fed's monetary policy will have implications for most central banks in the Gulf Co-operation Council, whose currencies are pegged to the US dollar.

“Any drop in the benchmark interest rates or higher-for-longer scenario will have an impact on interest rate-sensitive sectors in the GCC like banking, real estate, utilities as well as leverage companies,” said Faisal Hasan, chief investment officer at Al Mal Capital in Dubai.

“The investors here are also very international [in their focus] and changes in the monetary policy will impact their investment.”

Tariq Qaqish, chief executive at the Salt Fund Placement advisory firm in Dubai, said GCC countries must prepare for both administrations.

Mr Qaqish anticipates a Trump win would lead to a weaker dollar, thereby increasing liquidity into the region. A Harris win, he said, would lead to a stronger US dollar which would hamper economic growth.

Federal deficit

Regardless of who wins the 2024 election, the US federal deficit is expected to further increase.

The International Monetary Fund has warned that high fiscal deficits and the continuing increase in the debt-to-GDP ratio are not only a risk for the US, but also the global economy.

Ms Harris last week released some elements of her economic agenda, including expanding the child tax credit base from $2,000 to $3,000, expanding the earned income tax credit, advancing a federal ban on price-gouging on groceries and providing a tax credit of up to $25,000 for first-time homebuyers.

US Vice President Kamala Harris announced a plan to halt price-gouging at grocery stores as part of her economic agenda. Bloomberg

These and other plans make up the elements of the Agenda to Lower Costs for American Families, which outlines her intentions for her first 100 days in office.

All told, the plan would increase the US federal deficit by $1.7 trillion over a decade, according to the bipartisan Committee for a Responsible Federal Budget (CRFB). That figure would rise to $2 trillion if the housing policies became permanent.

Mr Trump has thus far not released a detailed economic agenda. The CRFB in July estimated that his plans to eliminate taxes on Social Security benefits would increase deficits by $1.6 trillion to $1.8 trillion through 2035.

The national debt also soared during Mr Trump's term in office.

According to another analysis conducted by the CRFB, Mr Trump added $8.4 trillion to the national debt. Of that, $3.6 trillion was from Covid relief laws.

Donald Trump speaks on the economy during a campaign event in York, Pennsylvania. Bloomberg

A second Trump term would likely be a continuation of the Make America Great Again agenda that defined his first term, where he wants further tax cuts and enhancing US industries, Mr Qaqish said.

“These policies could stimulate growth but will put more pressure on fiscal deficits,” he said, adding that geopolitical factors must also be considered. Should Mr Trump win and negotiate a ceasefire between Russia and Ukraine, as well as a peace deal between Israel and Palestine, then Mr Qaqish expects a lower level of government spending and national debt.

Corporate taxes in focus

In one major policy shift, Ms Harris's campaign said her administration would lift the US corporate tax rate to 28 per cent from its current rate of 21 per cent. The campaign's proposal is in line with President Joe Biden's most recent budget proposal.

Mr Qaqish said this would have a direct impact on investors, who would establish businesses outside the US to reduce their corporate taxes.

Mr Trump cut the corporate tax rate from 35 per cent to 21 per cent as part of his 2017 tax plan, and pledged to further cut taxes if he was elected president again. Mr Trump's tax plan brought the US's corporate income tax rate down from the fourth-highest in the world to roughly median, according to the Tax Foundation.

The non-partisan Congressional Budget Office (CBO) in 2018 said raising the current corporate tax rate by one percentage point would raise US revenue by $96 billion from 2019 to 2028.

Mr Trump's tax plan is set to expire at the end of next year, and will be one of the biggest issues facing Congress when the new session begins.

Extending the tax cuts would add $3.3 trillion to the US deficit over the next 10 years, the CBO said.