Accepting the realities of a 50/50 Senate ‘majority’ isn’t a fun exercise for most members of the president’s party but by now should moderate presumptions of what’s possible. For example, one cannot doubt Build Back Better is dead after listening to and reading Senator Joe Manchin’s words from a Sunday CNN interview. It is now apparent that the fate of any remnants from President Biden’s signature fiscal proposal are not viable under reconciliation rules, meaning any fiscal accomplishments this year will be bipartisan.
The Hutchins Center within Brookings measures fiscal impact, and their analysis is presented in the accompanying chart. In the year from March 2020 to March 2021, two presidents signed into law $4.928 trillion of stimulus to counteract the economic and medical consequences of the novel coronavirus. The Center’s projections track the runoff of that spending through 4Q23. A probable, justifiable consequence of the largesse is the lack of momentum behind additional emergency spending for COVID relief. Stressed healthcare people and systems could use additional funds, but that money likely will come from unobligated balances residing within Treasury and state coffers.
The FY22 spending path forward continues to clarify. The next continuing resolution would run through March 11, ten days after the State of the Union address. The parties are narrowing bids and asks for FY22/23 toplines and percentage increments for defense and nondefense spending which should unleash new spending for infrastructure, clean energy, defense, and earmarks whose beneficiaries are more accurately measured, if possible, after the bill is signed into law.
Uncertainty around tax policy heightened on Sunday when Senator Manchin demanded child tax credit renewal, in any form, and green energy credits undergo “regular order” to become law. This would require 60 Senate votes. It matters not that the infrastructure bill Manchin supported was enacted skipping a few steps of regular order; reconciliation for this Congress would appear unavailable. We remain constructive on tax legislation this year because the 40 provisions that expired last December include items important to plenty of Members, especially in the bicameral, bipartisan leadership.
A bit of confirming news came yesterday in the Congressional Budget Office’s monthly budget report. As is true in most economic recoveries, revenues for the first four months of this fiscal year are ahead of 2021 monthly measures. To the extent that high frequency data point to renewed growth, this series would be worth watching as the usually heaviest revenue quarter is just around the corner.
One outcome of very likely divided government next year would be a return to fiscal standoffs reminiscent of the 2011 – 2015 period, the last split-power US government. Markets should expect a return to debt ceiling and fiscal policy scares if lessons from the Obama presidency hold relevancy, which we think is highly likely. Already some suggest GOP candidates for office should pledge to make the Trump 2017 tax cuts permanent as some roll off at the end of 2025. The 2013 and 2015 fiscal agreements involved significant tax cuts signed by a Democrat in the White House. Fiscal retrenchment now likely is a good primer for potential fiscalamity risk to come.
