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AltAusterity Digest #106 August 8-14, 2019

This week in Austerity News:

Aug 16, 2019

In a bid to appease voters, Argentine President Mauricio Macri has announced income tax cuts, a rise in the minimum wage and increases in welfare subsidies after losing a presidential primary to centre-left candidate Alberto Fernández. The primary was introduced in 2009 to cut down on the number of presidential candidates and is seen as an important poll for who will be the next president. Candidates must win at least 1.5% of the primary vote to be eligible to run for president. The 47.7% of the primary vote won by Mr. Fernández (compared to 32.1% won by Macri) is seen as a rejection by voters of the harsh austerity measures that Macri has introduced. Argentina’s struggles with recession and extremely high inflation have not been alleviated by Macri’s austerity policies.

This week government bond markets, often seen as one of the safest markets, generated an “inverted yield curve.” Typically, investors expect to receive higher returns (“yields”) on longer-term bonds because they are required to lock in their investment for a longer period, which means greater uncertainty. Amidst a global economic slowdown accelerated by the U.S.-China trade war and uncertainty over Brexit, investors are now demanding higher returns for short term bonds than they would for long term bonds, leading to an inverted yield curve for the first time since 2007. The Federal Reserve Bank of San Francisco published a letter last year describing how the yield curve has a “strikingly accurate record of forecasting recessions,” considering it has inverted before every U.S. recession since 1955. On average, there is an 18-month period between the inversion and the start of a recession. With many central banks not in a position to cut already historic low interest rates and the fiscal capacities of many governments eroded by decades of tax cuts, it is currently unclear what tools will be available to mitigate a potential economic crisis.

The new UK Conservative government has promised billions of pounds in new spending despite uncertainty over a potential no-deal Brexit. During his leadership campaign, Boris Johnson announced several spending pledges on police, schools, and deprived towns. While there is not much detail on how exactly this money will be spent, Finance Minister Sajid Javid has said he will give more details next month before releasing the full annual budget later in the year. Additionally, Johnson has said his government will raise the income threshold for the 40% rate from 50,000 to 80,000 pounds and will also reduce payroll taxes for lower earners. Based on these loose plans, credit rating agency Moody’s has estimated that these measures would result in a deficit of 1.5% of GDP. However, the outcome of a Brexit deal will have significant effects on both fiscal priorities and capacities.

The Trump administration has come under fire for fiscal irresponsibility from both Republicans and Democrats as the federal deficit reached $867 billion within 10 months. The Treasury Department has predicted a $1 trillion deficit by the end of the fiscal year. This represents a 27% increase in the deficit over last year, largely due to the $1.5 trillion tax cuts passed by Republicans through the Tax Cuts and Jobs Act of 2017. The Committee for a Responsible Federal Budget has estimated that the current trajectory combining Republican tax cuts and spending by Congress will add more that $4.1 trillion to the federal debt by 2029.

That's it for this week's Digest! Check back next Friday morning for another edition, or subscribe to our newsletter for a weekly roundup. We'll also Tweet each time we add new content, so you can keep up with our work @AltAusterity and join the #altausterity conversation.