The US $ 1.9 billion (roughly 8.5% of 2020 GDP) bailout package will provide a significant boost to economic activity in the US, with GDP exceeding prior levels the crisis by the end of 2021, well ahead of some of the European countries. the largest economies, including France and the United Kingdom.
The fact that the Biden administration was able to implement this important stimulus package within two months of his inauguration is positive for America’s AA credit rating.
The greatest near-term push towards aggregate demand is expected to come from payments to households, which make up about one-fifth of the total package.
In addition, continued accommodative monetary policies in the United States are likely to increase the short-term multiplier effects of the package, bringing US growth in 2021 and 2022 to around 5-6% from our previous estimate of around 3-4%.
The composition of stimuli matters, not just size and timing
Biden’s new deal corrects two interrelated credit weaknesses – medium-term growth potential and troubling social outcomes – at the expense of the third, the structural deterioration in US public finances.
In addition to direct payments to households and the extension of unemployment benefits and tax credits for families, the package provides support to federal and local government, schools, transport and Covid-19 vaccination, as well as assistance to households with rent, utility and mortgage payments. The budget impact this year is around $ 1.2 billion, then around $ 500 billion in 2022, the remainder in the years to come, according to CBO estimates.
These measures should help fight entrenched economic disparities, ranging from a high proportion of people dependent on federal programs for food, health care, education and housing to increasing levels of income and wealth inequality.
These structural weaknesses weigh on aggregate demand and productivity growth. Addressing the challenges, which will also require substantial structural reforms, could ultimately increase medium-term growth potential, which we estimate at around 1.9%.
U.S. fiscal fundamentals will remain structurally weaker for years
Nonetheless, with the additional stimulus, following the $ 900 billion package approved in December of last year, US fiscal fundamentals will remain structurally weaker for years to come. The overall fiscal cost is expected to be less than the size of the stimulus, with higher nominal activity offsetting about a quarter of the original discretionary stimulus measures according to the OECD. However, the government debt-to-GDP ratio is expected to increase by around 6pp by 2023 and reach around 135-140% of GDP by 2025. This would be close to 30pp above 2019 levels and around 15pp. above the debt ratios of France and the United Kingdom.
The total long-term impact of the stimulus measures on US production is uncertain
The full impact on US output of the stimulus is uncertain, as is the degree to which it will increase inflation. Inflationary pressures are expected to be short-lived and remain manageable – 5- and 5-year inflation expectations are still around 2% – while some inflation could even help dampen the rise in the debt-to-GDP ratio.
The litmus test for the stimulus package remains its success in improving the long-term potential growth of the United States given the country’s polarized policies, which should continue to preclude a bipartisan agreement on fiscal consolidation even when the economy again running at full speed.
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Alvise Lennkh is Deputy Head of Sovereign and Public Sector Ratings at Scope Ratings GmbH.