Scott Morrison is quite the fan of ratings agency Moody’s. Last August, when the agency confirmed that Australia would maintain its triple triple-A credit rating secured by Wayne Swan in November 2011, he rushed out a press release lauding the decision. 

But we suspect Morrison won’t be saying anything about a new analysis from Moody’s last week, about the impact on the US economy of the Trump tax cuts. Moody’s analysts told investors:

[W]e do not expect corporate tax cuts to lead to a meaningful boost in business investment, which has remained tepid despite a supportive economic environment characterized by low interest rates, low inflation and strong corporate earnings. We believe it is likely that US nonfinancial corporates will prioritize activities such as share buybacks, M&A and paying down existing debt over investment beyond that already planned.

That doesn’t quite fit the narrative pushed by Morrison, the Business Council and their cheerleaders at the Financial Review, who insist company tax cuts will only be used for new investment and wage rises and generate a massive economic boost. But then again, why wouldn’t Moody’s conclude it will be used to benefit investors? After all, it’s what US CEOs have said they will do time and time again. It’s what has happened in the past when corporate tax cuts delivered windfalls. What more evidence do you need? Well, you can go to MarketWatch, which has helpfully compiled a list of the major US corporations engaging in the share buyback spree. One executive called the idea that companies would not use the tax cut to buy back shares “bonkers”.

Moody’s also pointed out that the unfunded nature of Trump’s tax cuts will blow out the US budget deficit — just like it will here. “As a result of the legislation, we expect deficits to widen faster than under our pre-passage baseline, resulting in faster accumulation of federal debt, a component of general government debt.”

Of course, we should note that not every US company is using the tax cut for share buybacks. Tissue and nappy giant Kimberly-Clark is using the tax cut to fund redundancies for around 5,000 US workers, or 13% of its workforce. The New York Times reported:

In a conference call with analysts on Tuesday, Kimberly-Clark’s chief financial officer, Maria Henry, said ‘cash flow benefits’ from the Republican tax cut would help fund ‘the restructuring program over the next few years.’

Oh but wait…

She said the tax savings would also be used to make capital investments and to ‘allocate significant capital to shareholders.’

Thought so.

Peter Fray

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