UBS On-Air: Paul Donovan Daily Audio 'Fiscal inefficiency'
02:40 Share

Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 24th of March. Media reports over the weekend suggest that the government restructuring attempts by US President Trump's megadona Musk are likely to cost about half a trillion dollars in lost tax revenue as a consequence of less efficient tax collection.

Financial market pricing certainly suggests that investors have not viewed Musk's attempts as promoting US government efficiency. Government efficiency would imply both rising equity and rising bond markets, as it would be both growth positive and reduce the deficit. Consensus forecasts have shown no inclination to reduce deficit projections either.

The US is unlikely to have too many problems funding its deficit in the short term, given the record level of wealth that exists in the United States at the moment. But if these reports of lost tax revenue are accurate, then the moment when the sustainability of the US fiscal position becomes market relevant is likely to be brought forward.

Tariffs are a way of raising tax revenues from US companies and US consumers, although the negative growth effect of these taxes will tend to offset other sources of fiscal revenue. Markets are now speculating about next week's promised big tax increases, with the idea that the burden will be more targeted.

It should be noted that the targeting is not likely to be directed by who pays, but instead by the nations that export. This is important. Targeting trade taxes by who exports rather than by who pays in the United States may then end up disproportionately hitting certain groups in society. Low-income households or the auto sector or geographic areas of the US economy.

For the moment, markets regard targeted taxes as being less damaging than some of Trump's social media posts have suggested. And given the erratic nature of trade policy from the US, investors are prepared to assume that the more extreme tax positions will be retreated from. The Turkish lira has remained weaker on the foreign exchange markets after the imprisonment of Istanbul's mayor on Sunday.

Mayor Emad Moglu has been expected to announce their candidacy for the next presidential election. Large-scale protests have taken place across Turkey in response to the arrest. The lira remains the most visible signal of market reactions to the political situation.

The data calendar today is very quiet. There are some business sentiment opinion polls due, but it's nearly impossible to muster up any enthusiasm for surveys when most polling response rates are falling and political partisanship is rising. There are some central bank speakers, including Bank of England Governor Bailey. Bailey has already had plenty of opportunity to speak, and so it's relatively unlikely that the market will react to their comments.

Fed Governor Barr, who recently resigned as a vice chair at the Fed, is speaking on small business lending. This is unlikely to be market moving, but it is of some interest to economists with regard to the longer-term trend economic outlook. That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG.

regulated by FINRA in Switzerland. Its subsidiaries or affiliates collectively referred to as UBS. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.

This material is for your information only and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product.

The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS.

please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.