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Tue, 25th April 2017

Anirudh Sethi Report

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Archives of “public finance” Tag

Trump To Order Corporate Tax Rate Cut To 15%, Loading Up To $2 Trillion In Extra Debt

Ahead of Trump’s much anticipated tax announcement on Wednesday, the WSJ reports that the president has ordered his (mostly ex-Goldman) White House aides to accelerate efforts to create a tax plan “slashing the corporate rate to 15% and prioritizing cuts in tax rates over an attempt to not increase the deficit” which means that without an offsetting source of revenue, Trump is about to unleash the debt spigots, a proposal which will face fierce pushback from conservatives as it is nothing more than a continuation of the status quo under the Obama administration, and may well be DOA.

The WSJ adds that during an Oval Office meeting last week, “Trump told staff he wants a massive tax cut to sell to the American people” and that it was “less important to him if the plan loses revenue.”

Hoping to add a sense of dramatic urgency – after all his 100 day deadline hits on Saturday – Trump told his team to “get it done,” in time to release a plan by Wednesday.

Translation: Trump’s massive tax cut will be funded by debt, and as a result, will be at best temporary as it will be in breach of the revenue constraints in the reconciliation process; at worst it will never happen as it will now require Democrat votes.

Fitch Downgrades Italy To BBB From BBB+

Having largely disappeared from the market’s scope for the past 6 months, ever since Europe “bent” its rule allowing the bailout of Monte Paschi and several smaller banks despite Italy having the greatest amount of disclosed NPLs of any European nation, moments ago Fitch decided to drag Italy right back in the spotlight when it downgraded Italy to BBB from BBB+, citing “Italy’s persistent track record of fiscal slippage, back-loading of consolidation, weak economic growth, and resulting failure to bring down the very high level of general government debt has left it more exposed to potential adverse shocks. This is compounded by an increase in political risk, and ongoing weakness in the banking sector which has required planned public intervention in three banks since December.

And some more:

 Italy has missed successive targets for general government debt/GDP, which increased by 0.5pp in 2016 to 132.6%. This is 11.2% of GDP higher than the target in the Stability Programme of 2013, the year Fitch downgraded Italy’s Long-Term IDRs to ‘BBB+’, and compares with the current ‘BBB’ range median of 41.5% of GDP. Fitch forecasts general government debt to peak at 132.7% of GDP in 2017, falling only gradually to 129.3% in 2020 in our debt sensitivity projections.

 Fitch’s rating Outlook for the Italian banking sector is Negative, primarily reflecting the challenge of reducing the high level of un-provisioned non-performing loans (NPLs), alongside weak profitability and capital generation. The rate of new NPLs edged down to 2.3% in 4Q16, and there is some greater impetus for disposals and write-downs, which has slightly reduced total NPLs. However, sofferenze, the worst category of loans, increased to EUR203 billion in February, from EUR199 billion in October. Total NPLs amount to close to 17.5% of loans and 20% of GDP, and just over half are provided against.

 In our view, political risks have increased since Fitch’s previous rating review. Current polls point to a further hollowing out of support for more centrist parties and to a fragmented political landscape that could result in minority government. Risks of weak or unstable government have increased, as has the possibility of populist and eurosceptic parties influencing policy. Greater populism may dampen political appetite for reform, increase the pressure for fiscal loosening, and weigh on investor sentiment.

With France – and much of Europe – already on edge due to populist tensions, is Italian sovereign – and bank – risk about to make a grand reapparance? For the answer, check in when Europe opens on Monday.

Meanwhile, Italian CDS trades at 190bps, wider than Russia, Croatia and almost as wide as South Africa.

INDIA RETURNED TO FISCAL CONSOLIDATION IN 2016-17: IMF

Notwithstanding the impact of demonetisation, India returned to fiscal consolidation in the fiscal year 2016-17 largely due to the near-elimination of fuel subsidies and enhanced targeting of social benefits, the IMF said on Wednesday.

“India returned to fiscal consolidation in fiscal year 2016/17, supported by the near-elimination of fuel subsidies and enhanced targeting of social benefits, notwithstanding the deceleration in growth related to the country’s recent currency exchange initiative,” the IMF said in its report on Fiscal Monitor released on the sidelines of the annual Spring Meeting of the International Monetary Fund and the World Bank.

The IMF said, in India, the headline deficit is projected to decline modestly in fiscal year 2017/18, with continued delay in reaching the medium-term deficit target.

The budget envisages a growth-friendly fiscal adjustment underpinned by expenditure cuts that protect infrastructure investment, as well as more progressive income taxes for individuals combined with lower taxes on small and medium- sized enterprises.

“The expected rollout of the nationwide Goods and Services Tax (GST) this year will enhance the efficiency of the internal movement of goods and services and effectively create a common national market,” the IMF said.

This Is The Nightmare Scenario For The GOP: A $2 Trillion Funding “Hole”

When one strips away the partisan rhetoric and posturing, the practical impact of Friday’s GOP failure to repeal Obamacare has a specific monetary impact: approximately $1 trillion.

Since the ObamaCare repeal bill would have eliminated most of the 2010 health law’s taxes, this would have lowered by a similar amount the revenue baseline for tax reform. Essentially, with the ObamaCare taxes gone, it would have been easier to pay for lowering tax rates. Now, if Republicans want to eliminate the ObamaCare taxes as part of tax reform and ensure the bill does not add to the deficit – which they need to do to assure Trump’s reform process continues under Reconciliation, avoiding the need for 60 votes in the Senate – they will have to raise almost $1 trillion in revenue.

In other words that – all else equal – is how much less tax cuts Trumps and the republicans will be able to pursue unless of course they somehow find a source of $1 trillion in tax revenue (or otherwise simply add to the budget deficit) to offset the Obamacare overhang.

Considering Paul Ryan’s statement on Friday, it appears that at least for the time being, Republicans would leave the ObamaCare taxes in place.  “That just means the ObamaCare taxes stay with ObamaCare,” he said. “We’re going to go fix the rest of the tax code.”

Ryan also pushed back on the idea that the setback on healthcare previews difficulties with other items on the legislative agenda  “I don’t think this is prologue to other future things, because members realize there are other parts of our agenda that people have even more agreement on what to achieve,” he said. “We have even more agreement on the need and the nature of tax reform, on funding the government, on rebuilding the military, on securing the border.”

China claims transparency on defense spending in its budget

Apart from saying its military budget will grow “roughly 7%” this year, China dropped no more hints on how much it was planning to spend on defense and foreign affairs amid rising tensions on both sides of the Pacific.

In the budget, the item “national defense” is substantiated by a guiding principle devoid of specific figures, while “foreign affairs” as an accounting item is not mentioned in the report.

 The Ministry of Finance said in the English version of the document that the department will ensure adequate funds to support China’s aim of “building a solid national defense and strong armed forces that are commensurate with China’s international standing and are suited to our national security and development interests.”

The two figures are usually disclosed in the country’s most important political event known as the “Two Sessions” every March, where its rubber-stamp legislature National’s People Congress and advisory Chinese People’s Political Consultative Conference converge.

Despite that, state mouthpiece Xinhua said on Monday that China’s total military budget for 2017 is 1.044 trillion yuan ($151.4 billion), citing an official at the Ministry of Finance. This compares with last year’s 954.35 billion yuan.

Premier Li Keqiang’s state-of-the-nation address and budget announcement on Sunday was the first time in decades that specific spending figures were not mentioned.

India : April-Jan fiscal deficit at 105.7% of FY17 target

Fiscal deficit in the first 10 months to January was Rs 5.64 lakh crore or 105.7% of the budgeted target for the fiscal year ending in March 2017, government data showed on Tuesday.

The fiscal deficit was 95.8% of the full-year target during the same period a year ago.

Net tax receipts in the first 10 months of 2016/17 fiscal year were Rs 8.16 lakh crore, the data showed.

The government’s tax receipts usually rise in the last two months of the fiscal year than its spending, thereby helping it meet the budgeted full-year fiscal deficit target.

The federal government reiterated earlier this month that it would meet the 2016/17 fiscal deficit target of 3.5% of gross domestic product, and had also set the next fiscal year’s target at 3.2% of GDP.

To get inside Beijing’s head, look at the numbers

As China gears up for its annual legislative session, all eyes are on the economy: specifically, how fast the Communist leaders intend China to grow, and what they are willing to sacrifice for that goal.

The most hotly awaited event of the National People’s Congress will come on March 5 — opening day — when Premier Li Keqiang will announce the government’s economic growth target for 2017. Many expect a downgrade from 2016’s goal of 6.5-7% to “around 6.5%,” according to a major bank.

 Beijing aims to bring China’s gross domestic product to twice the 2010 level by 2020 — a goal frequently, and mistakenly, taken to be merely an aspirational target. President Xi Jinping has called for the eradication of poverty in China by 2021, the hundredth anniversary of the Communist Party’s formation, and pledged a “great revival of the Chinese nation.” In this context, missing the mark could mean the leader’s downfall.

Doubling GDP over a decade requires 7.2% annual growth on average. Rates that were higher than that from 2011 to 2014 mean the country has only to hit 6.3% during the next few years. Targeting 6.5%, and thus avoiding a steep drop-off from last year’s goal, is a clear attempt to avoid any possible misstep ahead of the party’s twice-a-decade National Congress this autumn, when the group will name its next slate of leaders.

Keep spending

But in today’s China, 6.5% is no slight hurdle. To be sure, exports are recovering thanks to a brisk U.S. economy and a yuan some 10% weaker than at its peak. But areas outside major cities remain mired in vacant housing stock, and private investment is sluggish, leaving public works as one of the only viable drivers of growth.

New global exchange system to tackle tax avoidance

Tax authorities around the world will soon get a powerful new weapon in the fight against tax avoidance.

Next year will see the launch of the Common Reporting Standard, a new global system for the automatic exchange of financial account information between national revenue bodies. Set for launch in September 2018 the CRS has already been hailed as a game-changer.

 The system represents the international community’s response to criticism of rampant tax avoidance through offshore accounts in the Panama Papers.

“Assets held by wealthy people will become fully visible,” said senior Japanese tax official. “Its power will be tremendous.”

That view appears to be no exaggeration.

Established by the Organization for Economic Cooperation and Development, the system automatically provides for the exchange of information on accounts across jurisdictions.

The data will include the names and addresses of account holders as well as the account balances and interest and dividends earned on the holdings.

Fed’s Kashkari Says “Stock Prices Appear Somewhat Elevated”, Explains “What Might Be Wrong”

This morning, Minneapolis Fed Chairman Neel Kashkari penned an essay “Why I Voted to Keep Rates Steady” in which the former Goldmanite says that while core inflation “seems to be moving up somewhat, it is doing so slowly, if at all.”  He adds that “financial markets are guessing about what fiscal and regulatory actions the new Congress and the Trump administration will enact. We don’t know what those will be, so I don’t think we should put too much weight on these recent market moves yet.”

Repeating a on often heard lament about the lack of rising wages, Kashkari points out that “the cost of labor isn’t showing signs of building inflationary pressures that are ready to take off and push inflation above the Fed’s target” and adds that “it seems unlikely that the United States will experience a surge of inflation while the rest of the developed world suffers from low inflation.”

Union Budget 2017: Big cheer for taxpayers with income below Rs 5 lakh! Tax rate slashed to 5%

Union Budget 2017: Finance Minister Arun Jaitley in his speech announced that he will reduce the tax rate of individuals earning between Rs 2.5 lakh to Rs 5 lakh to 5% from the current 10%. This would also translate into an additional benefit of Rs 12,500 for tax payers even beyond Rs 5 lakh.

To part finance the additional burden on the government for this tax relief, FM Jaitley announced a surcharge of 10% for those earning between Rs 50 lakh and Rs 1 crore.

FM Jaitley also announced some changes that would encourage affordable housing. The holding period for immovable property for LTCG has been reduced to 2 years. FM Jaitley said that his tax proposals are directed at providing relief to the middle class and to stimulate growth. Jaitley cited a series of figures to show that India is largely a tax non-compliant economy.

Tax and industry experts were already expecting that to assuage the demonetisation pains of the common man and alleviate their sufferings, some tax reliefs may be provided in the budget. Even Finance Minister Arun Jaitley had hinted in his speeches earlier that the tax burden on taxpayers may be lowered due to higher tax revenues being collected on account of cashless systems.