After a disastrous August, Democrats' upcoming budget battle brings no relief

After a disastrous August, Democrats' upcoming budget battle brings no relief
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August is proving to be a month for the Biden administration to quickly forget. The coronavirus pandemic has flared up, inflation is a growing concern and the Afghanistan debacle is causing major headaches.  

Apart from these big three, there are other factors such as the migration issue on the southern border and the battle over voting laws which are essential to the Democrats' chances of holding onto Congress.

Amidst these gathering clouds, Biden and congressional Democrats are trying to get a massive stimulus package adopted which —if they manage to translate their plans into specific policies — would transform the U.S. economy and social system in the most radical way since Lyndon B. Johnson's presidency.

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Biden and his supporters in Congress are committed to a two-track policy: an infrastructure plan with mainly investments in 'hard' infrastructure with a size of over $1 trillion — which many Republicans can agree to, and which could therefore be adopted with the support of both parties — and a more comprehensive plan to broaden and deepen the welfare state that includes a combined $3.5 trillion in proposals.

If adopted by Congress and signed into law by the president, the trillions in the bipartisan infrastructure proposal would be used for the maintenance of roads, bridges, railways and airports, the modernization of the electricity network, the expansion of broadband internet, clean drinking water and a forceful approach to the climate crisis.

For the second part of Biden's grand ambitions, many initiatives have been lumped together to pass through Congress as a package via the budget reconciliation procedure. In brief, this means that 50 votes in the Senate instead of 60 are sufficient to pass a law — provided certain substantive and procedural conditions are met. This means that the Democrats could ensure, with their very small majority, that the Senate very narrowly passes the bill if they keep the ranks closed.

If — and this is a big if — Democrats succeed in getting their entire mammoth plan through, the federal government would guarantee citizens an additional four years of education. Medicare would be opened up to millions of extra people. Furthermore, many billions would be made available for the transition to electric vehicles, childcare and child benefits would be significantly expanded, and there would be more opportunities for taking leave from work to care for family. In addition, the package offers more space for unions and creates the opportunity to offer millions of migrants a way to obtain their papers.

All this would have to be financed by empowering the IRS to a greater extent and by raising taxes for companies and the rich. All in all, it would greatly expand the size and power of the federal government.

It is hardly surprising that the Republicans are not keen to participate in these plans. However, a number of moderate Democrats also have reservations. Speaker of the House Nancy PelosiNancy PelosiOvernight Defense & National Security — Presented by Raytheon Technologies — Navy probe reveals disastrous ship fire response GOP rep leaves committee assignments after indictment Under pressure, Democrats cut back spending MORE (D-Calif.) has therefore intertwined the more limited infrastructure package with the enormous budget plan.

It remains very much to be seen whether Biden and congressional Democrats will succeed in leaving a memorable mark on the U.S. economy and welfare state or whether their impact will turn out to be more fleeting:

  • A figure of $1-$1.2 trillion is constantly reported when it comes to infrastructure investments. However, just under $600 billion is reserved for newly planned investment projects, and this is spread out over five years. A 10-year horizon applies to the remaining hundreds of billions in investments that have already been subscribed. Moreover, you could argue about the extent to which the $600 billion in new expenditure is really new, as this also concerns money that was previously allocated for other purposes such as corona relief, but which is now being repurposed.
  • In any case, the socioeconomic plan will certainly not reach the size that it currently has on paper. The Democrats’ Senate majority is too small for this, and the group has too many moderate (some would argue conservative) Democrats. Moreover, House Democrats are very divided and the party’s majority in the House is not that big either. In addition, they can’t expect too much help from the GOP, as bipartisanship barely exists, if at all. Nevertheless, a smaller deal will ultimately be struck, as the bipartisan infrastructure framework in particular is widely supported by the American people. More generally, a majority of Americans want a greater role for the government. 
  • Financing is a major obstacle for both packages. This means that there is a real chance that the government will opt for the easy approach, with deficits being raised considerably — rather than taxes being hiked. Incidentally, we also have considerable reservations about the optimism about the additional billions that the IRS is supposedly able to collect.
  • The resurgence of the coronavirus crisis, the Afghanistan blunder and inflationary concerns will not make it any easier for Biden to pressure Congress into participating in his plans. Incidentally, if success is achieved at all, this will materialize in October at the earliest. By then, the government will also have to find a solution to the debt ceiling that has been reinstated (it had been suspended for a few years by Congress). If the ceiling is not raised, Biden can certainly forget about his plans.
  • The scenario above could result in the Fed having to postpone its plans to start tapering at the end of this year. Fed members could become more reluctant to ease off the monetary gas with a pandemic that will continue to cause damage for longer than anticipated, less fiscal stimulus than previously assumed and a deteriorating international political climate.

Andy Langenkamp is senior political analyst at ECR Research which offers independent research on asset allocation, global financial markets, politics and FX & interest rates.