What impact will Biden’s new deal have on growth?

Goldman with the note:

President Biden released his budget proposal to Congress, which calls for an increase in the deficit of $800bn over 10 years (0.3% of GDP over that period) to accommodate his “American Jobs Plan” (AJP) and “American Families Plan”(AFP). While the amount is not surprising, this is the first time the White House has formally shown the net effect of their proposals over the ten-year period. Congress will use when it considers them.

Those plans would raise spending by a total of $4.4 trillion over ten years (1.5%of GDP over that period) and increase tax revenues by $3.6 trillion (1.3%). Congress will likely scale back many of these proposals; our current forecast is for a package of slightly more than $3 trillion over 10 years, with tax increases of around half that amount, but we believe the risks lie modestly to the downside of those amounts.

We expect congressional Democrats to pivot away from bipartisan infrastructure negotiations in the next couple of weeks and to begin to move forward with reconciliation legislation—requiring only Democratic support—that includes many of these proposals. House passage could come by July, but the Senate looks likely to take until September or October to act.

The Most Important Number in the Biden Budget

The President’s two signature fiscal packages would add $800bn to the deficit over the next ten years. This figure is likely to be relevant to the congressional debate, as Democratic leaders will need to choose a dollar figure to include in a forthcoming budget resolution that directs the committees that will craft the fiscal package. Whatever figure they choose figure will set a limit on the reconciliation legislation that follows. In most recent budget resolutions, the directive has come in the form of a directive to increase the budget deficit by a certain amount. However, congressional leaders could also specify separate spending directives and tax directives. In either case, once the amount is set, the legislation that follows may not increase the deficit by more than directed. While congressional Democrats are free to choose a different amount, the Biden budget is the first formal indication from any of the key decision makers regarding how much they propose to increase the deficit to fund their proposals.

We expect Congress to scale back the proposal, with a risk that it is scaled back more than we have been expecting. Our forecast assumes that Congress enacts a package of slightly more than $3 trillion, with tax increases of around half this much. However, for the first time since the start of the pandemic, the risks to our fiscal assumptions appear skewed to the downside. If congressional leaders adopt the White House position that the total deficit impact of the forthcoming fiscal package should be kept to around $800bn over ten years, this would mean that Congress would need to raise taxes more than we expect, or increase spending less than we expect.

The budget highlights the smaller scale of any additional fiscal boost. The budget proposes to increase the deficit by $118bn (0.5% of GDP) in FY2022, and $224bn (0.9%of GDP) in FY2023. Spending would increase by more than this—$265bn (1.1%) and $530bn (2.2%)—but around half of this would be offset with tax increases. These are big numbers in a normal policy and economic environment, but this amounts to only a fraction, on an annual basis, of the fiscal support Congress has provided over the last year. The chart below shows the Biden Administration’s estimate of the proposals effect on the budget deficit over the next ten years.

Houses and Holes

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