- Unlike the recent stimulus bills, the money will be spent over years rather than months/quarters. The financial market impact will probably be most noticeable in specific equity sectors rather than in broader markers like the US dollar or Treasuries.
- Higher taxes on firms and those in the top income bracket could cover part of the cost, but pushing tax hikes through could be a huge task.
Buoyed by the passage of the USD 1.9 trillion stimulus bill and accelerating vaccination progress, Joe Biden’s team is turning to the next major item on its agenda, an expansive infrastructure programme.
What we know so far
Biden’s staff envisage a two-pronged approach:
One tranche of at least USD 1 trillion on ‘traditional’ physical infrastructure such as bridges, roads, power networks, water supply and telecoms – all with an eye toward the challenge of climate change.
The second element would address social policies regarding such issues such as childcare availability/cost, health insurance affordability and access to community college.
To help part pay for all this additional spending – estimates suggest a total cost of USD 3-4 trillion – the administration is considering possible tax increases including raising the top rate of income tax, reversing part of Trump’s corporate tax cut and changing the rules that govern how much US-headquartered firms pay on their overseas profits.
Timing – when will we know more?
Biden is expected to unveil a more detailed – although still high level – version of his plan in a speech in Pittsburgh on 31/03/2021. But it is still likely to be only partly costed and to lack clarity on the extent of any tax increases.
Media reports suggest that Biden’s Chief of Staff has already given a more detailed briefing to senior Congressional Democrats, probably to try to judge how much political support there is for individual parts of the plan.
Few such major proposals ultimately get done without a deadline or sense of urgency to push the process along and force politicians to compromise. In the case of an infrastructure bill, there is a loose deadline of end September when the temporary extension to the FAST act (which provides funding for various road and transport programmes) expires. But this date is far from a binding constraint. Another one-year temporary extension of FAST is perfectly possible, and no one should be surprised if the debate on Biden’s infrastructure bill rolls on into the autumn or even into 2022.
Recent Democrat infrastructure proposals – a basic guide to what to expect
One of the centrepieces of Biden’s campaign platform was a USD 2 trillion policy to repair America’s infrastructure, make it more resilient to climate change and help reduce fossil fuel emissions. That ranged from a commitment to make America’s electricity supply carbon-free by the middle of the next decade; make homes more energy efficient; reduce the reliance on cars in cities by investing in public transport; strengthening and expanding broadband networks and repairing physical infrastructure such as bridges, highways and dams. Many or all of these elements are likely to appear in Biden’s formal infrastructure proposal, but Democratic members of Congress will also want their own input.
House Democrats put forward their vision last summer when they passed a USD 1.5 trillion infrastructure bill. Much of the work that went into that will likely reappear in an upcoming infrastructure bill. Key provisions included USD 300 billion for road and bridge repair, USD 130 billion for school buildings, USD 100 billion on zero emission buses, USD 100 billion to extend broadband provision, USD 70 billion on water infrastructure and USD 70 billion to upgrade the electric power grid.
(The limited) prospects for bipartisan support
Whether or not Biden’s bill can garner at least 10 Republican Senate votes will be the biggest determinant of how it can be financed. With Republican support, there is nothing in principle to stop the entire package being deficit-financed in perpetuity. But realistically, finding 10 Republican votes for this bill looks nigh on impossible. No Republican is going to agree to tax increases and finding 10 GOP Senators to back all the social policy elements the Administration is proposing looks like a huge stretch.
There has thus been speculation that Biden may divide the bill into two pieces of legislation to try to make it more palatable to Republicans: 1) A deficit-financed, pure-infrastructure package intended to secure Republican support and 2) a follow-up bill dedicated to taxes and social policy intended to be passed on a pure party line basis.
While Biden might want to claim he passed a major piece of legislation with bipartisan support, there is little political appeal for Republicans to support such a move. In practice this means the most likely outcome is a single bill passed through the reconciliation process, as the USD 1.9 trillion stimulus package was earlier this month.
However, the reconciliation process comes with some limitations, the most significant of which bars legislation from adding to the deficit beyond 10 years. This would probably mean that Democrats will have to push through enough tax increases to pay for any new domestic policy issues (childcare/free community college, etc.) while the spending on physical infrastructure can simply be deficit-financed but with a 10-year sunset clause.
How will it be paid for? It’s a taxing question
Biden’s administration are pondering the idea of tax increases to pay for at least some of the overall infrastructure bill. In particular, part-unwinding some of the Trump tax cuts that benefited the highest earners and companies. External estimates of the revenue such tax increases might bring are sizeable (Exhibit 1). The precise amounts would depend upon both how far the tax rate is upped and the breadth of the cross-section of households/firms subjected to it.
Exhibit 1: Simple estimates of revenue-raising options mentioned by the Biden administration
|Proposal||Cumulative 10-year tax revenue increase (USD bn)|
|Various tax increases on households with annual income of more than USD 400 000||999|
|Increase corporate tax rate from 21% to 28% (was 35% pre-Trump tax cut)||825|
|Various changes to international corporate taxation and minimum tax||646|
Source: US Tax Policy Centre and author’s own calculations
Any tax increases will have to get through Congress – always difficult, and not helped by Democrats’ wafer-thin majorities – but it is likely the options being floated are the upper end of any outcome.
Macroeconomic and financial markets impact: Spending likely spread over years, not months
While talk of a multi-trillion-dollar infrastructure bill naturally invites comparison to the recent USD 1.9 trillion fiscal stimulus, there is a big difference. The stimulus bill was designed to provide as large a boost to activity and employment as possible by spending the money rapidly (in months/quarters), whereas the infrastructure bill will spread expenditure over many years (Exhibit 2), and likely even well beyond Biden’s current presidential term.
Consequently, we would expect the largest reaction on financial markets to increased infrastructure spending to come through trades in specific sectors directly exposed to the increased demand for their services, rather than having much impact on macro asset classes like Treasuries or the US dollar. Separately, if corporate tax rates are raised and/or the framework for international taxation is changed, it would present a different set of potential losers.
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