After months of negotiations, in the next few days, the Senate will likely pass the infrastructure legislation that boosts spending by $550BN over several years, which includes most of the funding President Biden proposed for transportation infrastructure and other areas like water and broadband. However, it includes much less in the way of clean energy provisions, and omits the rest of the White House spending proposal entirely. Furthermore, although the bill was expected to fully offset the new spending with other budgetary savings, the bill as drafted appears to offset less than half the cost.
Then, following the likely Senate passage of the infrastructure bill, the Senate will then take up a budget resolution that calls for $3.5 trillion in new spending, financed primarily through tax increases and, to a lesser extent, spending cuts. The most important aspect of the resolution will be the amount of deficit expansion it allows. Since Democrats are unlikely to agree to more than about $1.5 trillion in tax increases, a resolution that does not allow for any deficit expansion could lead to a smaller spending boost.
So what will the final product look like?
One answer comes from Goldman's chief political economist Alec Phillips who writes that he expects Congress to approve around $3 trillion over 10 years in additional spending, consisting of around $500BN from the bipartisan infrastructure bill and another $2.5 trillion from a budget reconciliation bill, and "although the risks have tilted to the downside of this amount over the last several weeks, the risks appear more balanced at the moment." That said, he adds that there is still "a chance that centrist Democrats scale back the spending proposals due to concerns about deficits and tax increases." However, the likely passage of a$3.5 trillion budget resolution leaves open the possibility that the upcoming reconciliation bill could boost spending by more than Goldman expects.
Ultimately, it looks likely to take another few months for Congress to finalize these bills and although timing is uncertain, Goldman believes it could take Congress until December to pass the broader budget reconciliation bill: "although the bipartisan infrastructure bill could potentially pass the House by September, there is a good chance that House action on that bill will be tied to the reconciliation bill, leaving final action on both until late in the year."
Summary aside, here is the extended Goldman Q&A on the trillions in infra stimmies on deck:
Q: What did the Senate just agree to?
A: On July 30, the Senate voted to move forward with debate on infrastructure legislation. All 50 Democrats and 16 Republicans voted to begin debate on the infrastructure bill that the House recently passed. This is for procedural reasons only: with the text of the Senate’s infrastructure bill now complete, Senate Majority Leader Schumer will offer it as an amendment, replacing the text of the House bill with the new Senate version. The Senate is likely to vote on additional amendments to the Senate version over several days, and looks likely to pass the infrastructure bill sometime between August 5 and 8.
Q: What’s in the bill?
A: The bipartisan package includes most of the funding that President Biden requested for traditional infrastructure. It focuses primarily on traditional transportation infrastructure and other investments in utilities-related infrastructure (water, sewer, electric, broadband). It omits most of the spending on clean energy and electric vehicles that the White House proposed, and omits entirely the proposed funding for construction of affordable housing, schools, and health facilities. Unsurprisingly, it does not address any of the social benefit spending the White House has proposed.
Q: What’s not in the bill?
A: The bipartisan group left out several parts of the “American Jobs Plan”. The bill omits funding construction of public housing, schools, and health/social service centers, and it includes much smaller amounts for electric vehicles and clean energy than President Biden had proposed. Congressional Democrats are likely to address those policies, along with a number of social benefit expansions, in separate reconciliation legislation, discussed below.
Exhibit 1 compares the White House proposals to the new Senate infrastructure bill and a separate Senate-passed economic competitiveness bill. As shown in the table, beyond the infrastructure bill there could be as much as $4.3 trillion in other spending that congressional Democrats or the White House have proposed and might consider including in the upcoming reconciliation bill. As shown in the far right column, we expect many of these proposals to be pared back, either by reducing the generosity of new benefits or making them temporary to reduce their 10-year cost. Overall, we expect Congress to approve a total of around $3 trillion in spending over ten years.
Q: How would the new spending be financed?
A: The infrastructure bill includes spending and tax changes, but these appear to offset less than half of the new spending. The bill’s authors have released documentation suggesting that a variety of spending changes, along with a few tax changes, would fully offset the budgetary impact of the new spending. However, the amount of budgetary offsets in the bill looks smaller than expected. The text of the bill that was released late on August 1 appears to include only around $200bn in provisions to cut spending or raise revenues. This includes around $41bn in rescissions of COVID-relief funding approved in 2020 and earlier this year (earlier summaries of the bill had indicated it would cut $205bn). Overall, while this bill has been described as not adding to the deficit, we expect that gross and net spending under this bill will be similar, with little offsetting negative fiscal impulse from these savings provisions.
Exhibit 2 compares the offsetting savings provisions in the Senate infrastructure bill to the White House proposals and shows there is virtually no overlap. This leaves all of the tax proposals as potential sources of revenue in the upcoming reconciliation legislation. As shown in the right of Exhibit 2, we expect tax increases of around $1.5 trillion over ten years, along with a much smaller amount of spending reduction.
Q: How does the bipartisan infrastructure bill compare to expectations?
A: We had been skeptical that Congress would enact a large infrastructure bill on a bipartisan basis but we expected a narrower bill to pass; the current proposal is somewhere in the middle. Reaching a bipartisan agreement on substantial tax increases or spending cuts looked unlikely, so we did not expect a large bipartisan infrastructure bill to pass unless lawmakers opted not to offset its cost. Rather than pass a broad bill, we thought Congress would ultimately adopt a narrower bill that renewed and expanded transportation infrastructure programs that are due to expire September 30. The proposal the Senate is debating now is broader than we expected, though it is still not entirely clear that lawmakers have resolved how to pay for it so the amount of new spending might still decline.
The bipartisan bill does not substantially change our expectations regarding overall spending and tax increases. The alternative to a bipartisan infrastructure bill has always been a larger single reconciliation bill that included a similar amount of funding. One way or another, an increase in infrastructure spending has been likely to pass, either as part of a bipartisan bill or Democratic reconciliation legislation.
Q: What happens next?
A: It could still take months for the infrastructure bill to become law. The Senate is likely to debate the bill for several days, with a vote on final passage likely on or around August 5. Assuming the Senate passes the bill, the House still needs to act. House Speaker Pelosi stated on several occasions that she intends to defer further consideration of the infrastructure bill in the House until the Senate has also passed the broader “reconciliation” bill that includes most of President Biden’s other proposals. There is a good chance that she will keep to this plan, though we note the pending expiration of the highway and transit programs on September 30 is likely to put pressure on Democratic leaders in the House to pass the Senate bill before then.
The infrastructure bill faces two important challenges, however. First, there is no official cost estimate from CBO and, as we described above, there is a good chance that the budgetary savings provisions the bill relies on to finance the new spending will come up well short of what the bill’s authors have outlined. If the bill is seen to add to the deficit, some Republican lawmakers might withdraw their support unless the spending in the bill is also reduced.
Second, the House already passed a different infrastructure bill that included less funding for highways and more funding for public transit and clean water. The main author of the House bill, Transportation Committee Chairman DeFazio (D-Ore.), has already raised objections to the Senate’s version. Any changes that House Democrats make would likely reduce support among Senate Republicans for the final version.
Q: Where does the broader fiscal legislation stand?
A: The process on the “reconciliation” bill has not begun, but the Senate is likely to take the first steps in the next several days. The reconciliation process protects fiscal legislation from filibuster, but requires more procedural steps than normal legislation. First, the House and Senate must pass identical budget resolutions that instruct relevant committees to change spending, revenues, and/or the deficit by certain amounts by a certain date. The Senate is likely to take the first step on this, probably immediately following Senate passage of the infrastructure bill. The House, which is scheduled to be on recess until September 20, looks likely to return briefly in late August to pass the budget resolution.
Once the resolution has passed, the relevant committees will write legislation to satisfy those instructions through changes to programs under their jurisdictions. The committee process is likely to begin in September, but it could take some committees until October to pass their pieces of the legislation. From that point, the timing will depend on how long it takes for Democratic leaders to secure the support of essentially every Democrat in both chambers. While the timing is very uncertain, we believe the most likely scenario is that the bill reaches the President’s desk shortly before the end of the year.
Q: How big will the broader fiscal legislation be?
A: The Senate budget resolution looks likely to call for $3.5 trillion over ten years in new spending but we expect the eventual reconciliation bill that follows to be somewhat smaller, at around $2.5 trillion. Senate Democrats announced that their budget resolution will call for reconciliation legislation that includes $3.5 trillion of new spending (we interpret this amount as including tax benefits like extending the expanded child tax credit). We expect that the resolution will assume slightly more than $2 trillion in tax increases and several hundred billion in reduced spending (this would relate mainly to lower payments for prescription drugs, but the resolution itself is unlikely to specify this). It also looks likely that the resolution will assume at least a few hundred billion dollars in deficit reduction from “dynamic scoring”, which counts the revenue gains that result from the boost to output that the bill brings about. Dynamic scoring provides savings of $56bn/10yrs in the bipartisan infrastructure bill, or around 10% of the amount of new spending in the bill.
At this point, all 50 Senate Democrats look likely to support the resolution, but some—Sens. Sinema (D-Ariz.) and Tester (D-Mont.) among them—have expressed concerns the $3.5 trillion figure could be too high, while others like Sen. Manchin (D-W. Va.) have insisted that the new spending must be offset with tax increases or other savings measures. However, several centrists have also expressed reservations about a number of the tax increases that President Biden proposed and seem very likely to oppose the tax increases that would be necessary to offset $3.5 trillion in new spending.
In light of those concerns, we expect Congress to eventually pass a bill somewhat smaller than the upcoming resolution calls for. Specifically, we think Democrats will be able to agree on around $1.5 trillion over ten years in tax increases (discussed below), and perhaps a few hundred billion in spending-related savings. Assuming an allowance of at least a few hundred billion in savings from “dynamic scoring,” this would allow for a bill that increases new spending by at least $2 trillion and as much as $2.5 trillion. With the separate infrastructure bill and a smaller competitiveness bill, this would likely result in a total spending boost of around $3 trillion over ten years.
Q: What are the risks to the amount of expected spending boost?
A: We think the risks to a $3 trillion spending boost are roughly balanced at this point. Until recently, we thought the risks leaned toward a smaller spending boost than we expected, as the bipartisan infrastructure bill faced serious obstacles and the forthcoming budget resolution did not appear to be building in any allowance for a deficit increase. However, at this point the risks seem more evenly balanced.
There is still clearly some downside risk to our spending assumption, as tax increases will be controversial and congressional Democrats might struggle to find even $1.5 trillion in new revenue. Without an allowance for a deficit increase in the reconciliation bill, this would make it very difficult to pass a spending boost of the size we expect. There is also a more general risk that one or both of the bills simply does not become law.
There is also a possibility of a bigger bill than we expect. While some centrist Democrats have called for the cost of the bill to be fully offset, this could be interpreted in different ways. For example, the White House described its American Jobs Plan as being fully offset by tax increases, but this was true only if measured over 15 years (the plan increases the deficit by around $500bn using the traditional 10-year estimation window). Since the proposed tax increases would be permanent but some of the spending would be temporary, lawmakers concerned about deficits might still allow for this looser interpretation.
The range of outcomes is also narrower over the next couple of years than the headline figures in the trillions might imply. Exhibit 3 shows the fiscal effects of legislation enacted in 2020 and 2021 along with, in the chart on the left, the effect of the Biden Administration’s roughly $4.3 trillion in spending proposals and, on the right, the roughly $3 trillion in spending we expect Congress to approve. In both cases, spending in 2022 from already-enacted COVID-relief legislation is likely to be substantially greater than the roughly 2% of GDP of additional spending the White House has proposed, and even in 2023 the amount of already-enacted spending could be comparable to the amount we expect Congress to enact over the next few months.
Q: How much will the bill increase taxes?
A: We still think taxes will rise by around $1.5 trillion over ten years (around 0.5% of GDP on average), less than half the amount that President Biden has proposed. This is roughly the amount of additional revenue that could be generated by a 25% corporate rate ($500bn), a 28% long-term capital gains rate ($250bn), a 39.6% top marginal individual rate ($130bn), greater tax enforcement (at least $100bn), tightening cross-border corporate tax rules ($400bn), and a variety of smaller changes to non-corporate business taxes ($300bn). We expect a partial restoration of the state and local tax deduction to offset at least $100bn of the revenue gain.