News in Charts: The shift to Bidenomics

Since President Biden’s inauguration in January 2021, there has been a shift in the aims and objectives of US fiscal policy. Inequality has increased over the last few decades, and income inequality is above advanced economy peers. The Biden administration’s aim is to reverse this trend by fundamentally reframing fiscal policy, seeing it as a positive rather than negative force in the economy. Secretary of the Treasury, Janet Yellen, has set out a government strategy that places greater weight on those further down the income ladder, encourages employment and modernises public infrastructure.

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Weaker US growth since the Global Financial Crisis (GFC) has left a $22 trillion shortfall in US GDP relative to its pre-GFC trend. The Biden administration views the $1.8 trillion stimulus package put in place at the time as too timid, and partly to blame for the resultant economic scarring. This administration has set out a much bolder fiscal stimulus package that aims to almost exactly match the shortfall in GDP caused by the COVID-19 pandemic, with an aim of reaching and potentially surpassing the pre-crisis trend. The $5.5 trillion stimulus package errs on the side of doing too much rather than too little. As a result, we have seen, and Fathom continues to expect, a much faster recovery compared to the GFC. This goes hand in hand with the risk of higher inflation.

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Government spending under the current administration is expected to reach the highest levels outside a recession in post-war history, with objectives that go further than just a speedy return to the pre-COVID status quo. The focus of spending is on supporting low-income households, with an increased focus on families, education, healthcare and climate change, as well as investing big on infrastructure via the Build Back Better Agenda. This broad increase in spending across a range of areas marks a shift from the low-intervention government that Americans have been accustomed to.

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While government revenues are expected to increase, bigger spending is not quite matched by bigger taxes, suggesting that the US is not adopting a Swedish-style system of high spending and high taxes. Nonetheless, domestic corporates are in the firing line of tax rises, with the Biden administration proposing a corporate income tax rate of 28%, up from the current 21% in place since 2018. And international firms are also being targeted, with a US-led proposal for a global minimum corporate tax rate of 15% now agreed by over 100 countries. The OECD estimates suggests such a policy would benefit high-income countries most.

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The Biden administration has already passed a large fiscal stimulus package, but the prospects for its ambitious spending agenda being passed into legislation hinge on politics. There has been some positive news for the Biden administration as the $1 trillion infrastructure bill passed through the Senate this week, which required some Republican support, although looming negotiations over the debt ceiling suggest that the final price tag may be lower than the White House wants. The Federal Reserve has also adopted a new approach, seemingly shifting its focus more towards the employment part of its dual mandate. The Fed is expected to tolerate short-run inflation overshoots to achieve this goal. That approach, combined with substantial fiscal stimulus means that there remains a question to whether price rises will become persistent.

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