Figure 1: U.S. Government Debt Projections (% of GDP)
Source: Continuum Economics
Infrastructure then Benefits Package
President Biden’s $2.25trn infrastructure spending covers 10 years (see White House factsheet), but the bulk is expected to occur in the first eight years between 2022 and 2029. Four main areas of corporate tax increases are identified, and estimates are that they would raise around $1.4trn over the same period — the White House assumes that the tax increases will be permanent, which in theory would make the proposal more budget-neutral over a 15-year period.
The problem is that the Democrats’ thin House and Senate majority means that net tax raised over the next 10 years will likely be more moderate. Senator Joe Manchin favors a 25% corporation tax, and if this were adopted then the tax hike would be $300bn lower over the period. House members and some Senators also want to see the state and local income tax deduction caps changed, which would reduce net revenue. Additionally, though Republicans oppose the corporate tax increases, the Democrats in Congress and the White House are expected to try to work on the $620bn transportation component, as it includes elements that cannot pass by Democratic-only budget reconciliation. The bills are expected in Congress in July-August for passage in September.
Part 2 in April will see a benefits package of approximately $1trn over 10 years for childcare, healthcare and education. As with the infrastructure package, the Biden administration may propose to eventually raise enough taxes over, say, 15 years to pay for these measures. However, over 10 years the revenue increase will be less and some proposals may not be able to pass through Congress, e.g. removing tax deductions for small businesses or the minimum 28% tax on the wealthy. Capital gains tax reform and restoring the top 39.6% tax rate over $400k are more likely to progress, but they only raise $500bn over 10 years.
From an economic perspective, the infrastructure and benefits that eventually pass through Congress will likely total $3trn over 10 years, but the 10-year revenue increase will likely be in the $1-1.5trn range. The difference would be covered by $1.5-2trn of extra budget deficit financing. Figure 1 shows our estimate of $2trn of extra budget financing, plus the $1.9trn Biden COVID relief package and CBO baseline. This would leave the debt held by the public at 113% of GDP by 2031. Provided that the Fed eventually only reduce U.S. Treasury holdings by $1.5trn between 2027 and 2031, the U.S. government debt ex financial asset and Fed holdings would still be under control at 90% of GDP at the end of the period. This sustainable government debt trend means that the U.S. does not need an extra yield premium and that bear flattening should eventually be seen when the Fed raise the Fed Funds rate from 2023.