On Wednesday, President Biden proposed another USD2.3 trn spending package, largely (but not exclusively) focused on infrastructure and green energy. The package contains no major surprises compared with his campaign proposals and recent media leaks.
The plan set out by Biden shows mixed ambitions and lacks detail, in our view. Crucially in our view, the plan fails to address the institutional and political decision-making reforms needed to accelerate infrastructure spending in the US. Instead, most of the spending seems to take the form of federal tax credits for tdruprivate-sector operators.
Unlike recent packages, this package is expected to be partly funded through tax hikes, especially on corporations. The corporate tax rate is set to rise to 28%, from 21% after the Trump tax cuts at the end of 2017. Taxes on foreign earnings will rise for US multinationals.
The Democrats are likely to once again seek to push the package through Congress without reaching out to Republicans. But this time, intra-party debate could be lengthier than for the USD 1.9 trn stimulus package voted in March. This new spending plan may not be voted until late summer or autumn. Significantly from the point of view of geopolitics and of gaining support for the new spending package, Biden has warned that China would “eat our lunch” if the US did not step up spending on infrastructure.
The impact on US growth of the American Jobs Plan, while still positive in aggregate, is likely to be more indirect and diffuse over time than the previous USD1.9 trn package. The impact of the associated tax hikes on business confidence needs to be monitored, even though for now we assume it will be modest. Overall, we would expect the new package to have a positive growth impact worth around 0.3/0.4 ppt of GDP per annum in coming years. We would expect additional measures to tackle climate change further down the line. These could give an extra boost to US growth.
Stepping back, the new package also confirms our view that policymaking in the US is in ‘soft’ Modern Monetary Theory (MMT) mode. With little worry being expressed about debt and deficits, this involves applying soft but likely persistent pressure on the Federal Reserve to keep borrowing costs acceptably low.