With former Vice President Joe Biden set to become the 46th President of the United States of America in 2021, the CBA Global Economics and Markets Research team assesses the outlook for the US economy after four years of President Trump’s “America First” policies.
Taken from the CBA Global Economic and Markets Research report in publications titled "International Economics: Selected Issues – Retail”, first published on 9 November 2020.
- Former Vice President (VP) Joe Biden looks to have secured the White House. But we expect a split Congress.
- We summarise former VP Biden’s key campaign policies and assess the implications for the US (and global) economy.
- The composition of the Congress can significantly limit many of former VP Biden’s policies.
Despite President Trump being unwilling to concede and with some legal challenges still pending, the base case is that former Vice President Joe Biden will become the 46th President of the United States of America on 20 January 2021. In this note we assess the outlook for the US economy after four years of President Trump’s “America First” policies.
We summarise some of former VP Biden’s key campaign policies and draw implications for the US (and global) economy. We also assess how the composition of Congress can significantly influence VP Biden’s policies.
So far, the Democrats have retained a majority in the House of Representatives. However, the balance in the Senate is unclear. Two seats in Georgia are headed for a run-off election on 5 January. If the Democrats win both seats, the Senate will be tied. In that situation the President of the Senate (who would be Kamala Harris) can break any tied votes.
However, political analysts think it will be a tall order for the Democrats to win both seats in Georgia. As a result, we think former VP Biden will face a split Congress. That is, a Republican Senate and a Democratic House of Representatives.
Former VP Biden will be the first President-elect since 1988 to take office with a split Congress. This matters because Presidents have very little power on their own to direct government spending and taxing. The two houses of Congress are involved in spending and taxing decisions via their law setting power. The President only vetos or accepts laws passed by Congress.
Some of VP Biden’s policies will face strong opposition in the Senate and therefore are unlikely to become law. VP Biden will have to negotiate and compromise. It doesn’t mean all his policies will be rejected. But the Biden Administration must find some common ground with the Senate in order to pass legislation which could be time consuming.
We expect former VP Biden will prioritise the health pandemic. The US is currently experiencing a third wave of covid-19 infections. Daily infection rates are five times higher than the initial wave (chart 1).
Former VP Biden has formed a 13-person coronavirus task force. He said panel would “help shape my approach” to managing the health crisis. The task force will also consult with state and local government health officials.
In the US, state governments have the authority to impose lockdowns. But VP Biden can encourage the creation of coordinated guidelines to help states manage the virus. However, US decentralisation means a nationwide lockdown is unlikely. But VP Biden would be more sympathetic to state-wide shutdowns than President Trump.
Fiscal stimulus will also be a priority. So far, US fiscal stimulus (as a % of GDP) has been lower than in many other developed countries (chart 3). Former VP Biden has said that he will pass the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act after he is inaugurated on 20 January 2021. A $US2.2tn (roughly 10% of annual US GDP) HEROES Act 2.0 has already been passed by the House of Representatives. This Act includes a second round of $US1,200 stimulus cheques and reintroduces the $US600 a week unemployment supplement. It also includes $US436bn of emergency funds for state and local governments. However, the Act does not have Senate support.
A split Congress (as is likely) suggests less, rather than more, fiscal support. If history serves as a guide to the future, Republicans are less supportive of fiscal stimulus when in opposition (chart 4). Many analysts suggest a fiscal stimulus package in the realm of $US500bn - $US1tn (2%-5% of GDP) is more likely.
The longer the US economy takes to recover, the greater the chance economic damage becomes permanent. This is why delays to providing fiscal support can be costly. For example, a growing number of American’s are at risk of being evicted and/or face defaulting on their mortgage repayments when a moratorium expires at the end of 2020. Displaced individuals would take more time to re-enter the workforce and some risk not returning to their pre-covid standard of living. This could result in a permanent loss of productivity of the economy.
Former VP Joe Biden campaigned to roll back some of President Trump’s tax cuts for high income earners and corporations. He also proposes increasing tax credits (akin to a tax cut) for low to middle income earners.
At the same time, former VP Biden wants to change the tax code to bring jobs back to America. He has proposed a 10% tax credit for companies whose investments create jobs in the US. He has also proposed a Biden Offshoring Tax Penalty of 10% of a US company’s profits when goods are produced offshore for sale in America. The tax penalty would also be applied to services that could otherwise be provided in the US.
Assuming VP Biden’s full tax proposal is passed, the Tax Policy Centre (TPC) forecasts that this would mildly slow the economic recovery. Tax credits to lower and middle income earners provide an important offset to higher taxes elsewhere (chart 6). The TPC estimate VP Biden’s tax changes would lower annual US GDP by between 0.3% and 0.7% from 2022 to 2030 (chart 7).
A spilt Congress can complicate VP Biden’s plans. The TPC expect VP Biden’s proposals to expand tax credits for families with children and Made in America tax subsidies are most likely to achieve Senate (Republican) support. In contrast, the TPC expects more pushback on the tax hikes.
Foreign policy and trade/international relations
As President, former VP Biden will have more control over America’s foreign policy. VP Biden’s presidency would follow what has been an unpredictable four years of US foreign policy. In the last four years:
- A trade ‘war’ started between the US and China,
- The US replaced the NAFTA with the USMCA,
- The US withdrew from the Trans-Pacific Partnership, and
- Pulled out of the Paris Agreement on climate change.
We expect former VP Biden’s approach will be more predictable, in line with past US governments. We expect former VP Biden will be more pro-trade and elevate multilateralism over unilateralism. Former VP Biden has said that he wants to mend relations with America’s traditional allies, such as Europe.
However, we don’t expect former VP Biden to change US policy on China much. Instead he is likely to use improved relationships with allies to put multilateral pressure on China.
Former VP Biden’s hard-line approach to China is also reflected in his $US700bn “Made in America” plan. He has promised to use “aggressive trade enforcement actions” to defend against unfair practices from China or any other country “seeking to undercut American manufacturing”. Whether or not former VP Biden plans to renegotiate some or all of the Phase One trade deal with China remains unclear.
Nevertheless, former VP Biden’s more predictable approach will help to remove some of the uncertainty about global trade (and particularly manufacturing). US and global manufacturing activity was falling well before the coronavirus pandemic hit, in part because of uncertainty caused by President Trump’s unpredictability. For example, global export volumes have been contracting since June 2019 (chart 9).
Former VP Biden’s campaign website says he plans to invest $US1.3tn in infrastructure over a 10-year period (roughly 6% of annual GDP). Infrastructure investment will be focused on creating middle-class union jobs, increasing the resilience of infrastructure to climate change (and reduce emissions) and revitalising communities across the country.
His proposals include:
- $US50bn in the first year to repair roads, highways and bridges.
- $US5bn over 5 years to invest in battery and energy storage technology.
- $US1bn per year in grants to ensure charging stations are installed by certified technicians, promoting high-paid jobs.
- $10bn over 10 years for transit projects that serve high-poverty areas with limited transportation options.
Infrastructure spending has been a shrinking share of the US economy over the last 60 years. Indeed, there has not been an occasion since 1962 when infrastructure spending has increased substantially (chart 10).
Well-calibrated infrastructure spending has the short term benefit of creating jobs and the long term benefit of increasing productivity. However, the Biden Administration plans to spread the investment over a 10-year period, limiting any short-term job creation and economic boost.
Former VP Joe Biden has said he will re-join the Paris Accord on day 1 of entering the White House. Part of re-joining the Paris Accord means pledging to cut emissions to net zero by 2050.
According to Bill Hare, chief executive of Climate Analytics, VP Biden’s pledge would put the Paris Accord’s goal of limiting global warning to 1.5c within striking distance for the “first time ever”.
Former VP Biden has pledged to invest $US1.7tn over 10 years in a “Clean Energy Revolution”. He has also promised that US energy will be 100% clean by 2035 (chart 12). VP Biden also plans to implement a climate adjustment fee. This is a fee imposed on carbon-intensive goods from countries who are failing to meet their climate obligations. Our carbon model suggests that Canada would be the most exposed to the climate adjustment fee if the US government judges it is not doing enough to combat climate change (chart 13).
A split Congress can limit VP Biden’s progress on climate change. Instead, VP Biden may have to rely on executive orders. For example, during his Presidency President Trump overturned over 70 environmental regulations. VP Joe Biden is likely to reinstate many, including vehicle emissions standards and limits on methane production for oil and gas operations.
Former VP Biden plans to use the additional revenue from tax hikes to fund the clean energy revolution. But with tax increases likely to face stiff opposition in Congress, the jury remains out on whether there would be adequate funds for his proposals.
So what does this mean for the US (and global) economy?
On balance, former VP Biden’s policies can create jobs, boost economic activity and lift productivity over the longer term. In the near-term, high government spending to combat the covid pandemic will drive economic activity. We expect a net increase in economic activity even if his proposed tax increases are accepted by Congress.
Over the longer-term, infrastructure investment and green technology can lift productivity. But with much of the spending spread over a 10-year period, rather than front-loaded, a jump in near-term economic activity in unlikely.
Former VP Biden’s policies will be costly. The tax hikes, if implemented, are expected to pay for some policies. Nevertheless, US government debt will also rise significantly. The Committee for a Responsible Federal Budget estimates his policies could add $US5.6tn to public debt, lifting debt to 127% of GDP by 2030 (chart 14).
It remains very uncertain how many of former VP Biden’s policies will be legislated if Congress is split. The Federal budget deficit will swell further if VP Biden is unable to pass tax hikes but finds common ground on other policies such as infrastructure investment.
In our view, a stronger US economy (relative to today) will support the global economy. We expect US imports will rise as VP Biden’s policies support consumption and investment. VP Biden’s pro-trade stance (with the exception of China) can also support US import growth. However, we expect the US trade deficit will rise. This is one of our main drivers for our lower USD forecasts over the medium to longer term.
Former VP Biden’s more predictable approach to trade and international relations can also support the global economy. However, we expect some tension between the US and China will likely continue for many years. Nevertheless, less uncertainty will be to the benefit of trading nations such as Australia, New Zealand and Canada.
EARN 0.50 CE/CPD HOURS FOR READING THIS ARTICLE
Colonial First State is pleased to confirm that the article “What's next for America? (9 Nov 2020)” has been accredited for a maximum of 0.50 Continuing Education (CE/CPD) hours by Portfolio Construction Forum, the specialist, independent, investment continuing education, accreditation and certification service.
While the CE/CPD hours are confirmed, they will not formally vest in your name until you have completed the Forum’s CE quiz for this learning activity – available at the link below. This is part of the best-practice compliance program that Colonial First State has adopted to manage CE/CPD obligations in today’s higher compliance environment.
As soon as you successfully complete the CE quiz – available at the link below – you’ll receive an email from Portfolio Construction Forum. It will contain a link to immediately access your CE/CPD certificate via your complimentary Forum MyCE record on the Forum’s .edu.au online learning platform (which records any CE/CPD hours you earn from the Forum's CE Affiliates and the Forum's face-to-face and online programs) so you can:
- see the knowledge/competency areas; and,
- view, print and export your CE accreditation any time.
These CE/CPD hour(s) can be used to help you meet the CE/CPD requirements of 16 governing bodies (regulators, associations, and institutes) – including ASIC, APRA, FASEA, FMA, AFA, and FPA CE/CPD requirements, to name just a few.
Please now click on the following link to complete the CE Quiz provided by Portfolio Construction Forum for this learning activity:
Are you being asked to log in?
- If you ARE already a member of the Forum, but you can’t remember your login details, you can retrieve them using this link:
- Click on the CE Quiz link above to complete the CE Quiz.
- If you ARE NOT already a member of the Forum, you just need to join – it’s instant and free.
- Click on the following link and complete the registration form: https://portfolioconstructionforum.edu.au/register/
- You’ll receive an email immediately – check your junk folder if you don’t get it. Click on the link in the email to verify your membership, and then log in using the member name and password in the email.
- Click on the CE Quiz link above to complete the CE Quiz.
If you have any problems, please contact Portfolio Construction Forum (phone +61 2 9247 5536 or email email@example.com).
Adviser use only
Unless otherwise specified, this document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at the date of publication. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Colonial First State is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension, FirstChoice Employer Super offered from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. It also issues interests in the Rollover & Superannuation Fund (ROSCO) and Personal Pension Plan (PPP) offered from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840. Colonial First State also issues other investment products made available under FirstChoice Investments and FirstChoice Wholesale Investments, other than FirstRate Saver, FirstRate Term Deposits and FirstRate Investment Deposits which are products of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is a wholly owned subsidiary of the Bank. The Bank and its subsidiaries do not guarantee the performance of FirstChoice products or the repayment of capital from any investments. This document provides information for the adviser only and is not to be handed on to any investor. It does not take into account any person’s individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) before making any recommendations to a client. Clients should read the PDS before making an investment decision and consider talking to a financial adviser. PDSs can be obtained from colonialfirststate.com.au or by calling us on 13 18 36.
From time to time, Colonial First State enters into alliance partnerships with dedicated and experienced investment specialists. Each alliance represents an agreement for Colonial First State to provide third party distribution services within the Australian Financial Services intermediary market.
Past performance is no indication of future performance.
Stocks and investment options mentioned are for illustrative purposes only and are not recommendations to any person to buy sell or hold these stocks.
Taxation considerations are general and based on present taxation laws and may be subject to change. Clients should seek independent, professional tax advice before making any decision based on this information. Colonial First State is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and clients should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.