Economic policies in focus for NAB as US election looms

Amid heightened focus on the US election, NAB’s economics team concludes there could well be more downside than upside risk to US economic growth from Donald Trump’s policies.

NAB sees an upside risk for bond yields, which could affect US shares, under a Trump presidency. Picture: AFP

The US election is coming up fast and, with Donald Trump rebounding in the polls in recent months, NAB has looked at the potential economic impacts of his policies and those of ­his presidential rival, Kamala Harris.

With little known about Harris’s plans for trade and immigration policy, and assuming no change in monetary policy under a Harris presidency, the focus there is fiscal policy.

US fiscal policy is set to turn contractionary under current policy due to expiring tax provisions, but Harris’s campaign promises suggest her fiscal policy would add stimulus, with short-term upside impacts on US economic growth, inflation, Fed policy, bond yields and the US dollar.

NAB’s US economic forecasts from 2025 have been based on a roughly neutral fiscal policy, so a Harris election would leave this assessment in place.

They assume Harris just offsets a contraction due at the end of next year, when some provisions of Trump’s Tax Cuts and Jobs Act of 2017, including increased tax deductions, individual income tax cuts and tax credits, are due to expire.

For Trump, NAB looks at his policies on immigration, international trade and the independence of the Federal Reserve, as well as fiscal policy.

On the fiscal front, Trump may go even further than Harris – subject to congress.

While this may provide a short-term boost to growth, other parts of his program – trade, immigration, and the threat to Fed independence – could have the opposite impact on the economy.

In terms of short-term impacts, the conclusion there is that a Trump presidency would give upside risk for economic growth from fiscal policy, but downside risk from immigration, trade and Fed policies.

Similarly, Trump’s fiscal policy is also expected to lift inflation, interest rates and the US dollar.

But NAB has question marks over the impact of his immigration policy on inflation and Fed policy, while seeing an upside risk for bond yields. It can’t say what impact Trump’s goals regarding immigration, trade and Federal Reserve independence would have on the Fed’s monetary policy settings. Exactly what he delivers on those fronts would be key.

Trump has flagged large increases in tariffs, increased border security as well as “mass” deportations, although the latter may be difficult in practice.

“While these may represent negotiating positions and could be scaled back, these policies would reduce economic growth, although there could be an offset if fiscal policy was to turn stimulatory,” NAB senior economist Tony Kelly said.

Democratic presidential nominee, US Vice President Kamala Harris. Picture: Getty Images

He expects inflation to rise as a result of Trump’s policies, but says the impact of tariffs would be temporary. Thus the net impact on economic growth of high inflation would be uncertain.

Just how the Fed would adjust interest rates in that environment would depend on the overall economic environment.

Trump has also committed to increasing US oil and gas drilling and getting the oil price down. That course is a potentially significant offset to other policies that might lift inflation.

“The overall impact on growth of Trump’s policies will depend on the timing and the scale of implementation of each part of the program,” Kelly said.

“Some elements are more likely to be implemented than others, particularly those that do not require congressional approval, like increasing tariffs and stricter immigration law enforcement, suggesting a greater downside risk to growth than upside from the Trump platform.”

Trump’s aim to have a role in the conduct of monetary policy is “possibly highly consequential” – and risks a permanent shift higher in inflation and interest rates.

“While we think the likelihood that he will be able to carve out such a role is low, even the attempt to do so could be damaging,” Kelly said. “The Fed could react to any doubts over its independence by being more hawkish than it otherwise would be.”

Of course US fiscal policy decisions are largely the preserve of congress, although the president does have veto powers, subject to some constraints, and polls suggest that control of congress could well be divided, with Democrats controlling the House and Republicans the Senate.

“In this event, the ability of the winning candidate to deliver their platform would be highly constrained,” Kelly added. “Even if the president’s party controls both houses of congress, the president’s campaign promises may not be implemented in full.”

This is particularly so if the majorities in congress are small, as some members may have other priorities, and the Senate “filibuster” – which allows legislation to be blocked unless there is a three-fifths majority in favour – is also a potential issue. “Budget reconciliation” means changes can be made even with a simple majority, although it comes with constraints such as no increase in the deficit beyond a 10-year window.

“While it is possible the president may not be able to fully deliver on their platform, the fact that both campaigns are pushing to extend, at least in large part, the tax provisions of the Tax Cuts and Jobs Act suggests it is unlikely they will all expire,” Kelly said.

This means that any negative fiscal impulse centred on early 2026 is unlikely to be large, and there’s even a risk that fiscal policy ends up being stimulatory.

The Committee for a Responsible Federal Budget’s central estimate for the Harris and Trump campaign promises is that they will increase the budget deficit, on average over a 10-year window, by about 1.1 and 2.2 percentage points of GDP respectively.