Economy

The Impact of US Government Spending Plans




The White House in Washington, DC. The Biden administration’s proposed spending plans are expected to boost the economy and raise GDP. (photo: lucky photographer by Getty Images)










Boosting the Economy: The Impact of US Government Spending Plans




By Andrew Hodge and Li Lin
IMF Western Hemisphere Department




July 1, 2021
















Despite the tragic loss of life and immense challenges brought on by the pandemic, the US economy is making a remarkable recovery. The Biden administration’s proposed spending plans will add momentum, raising GDP by more than 5 percent from 2022 to 2024, and will create a lasting impact by increasing productivity and labor force participation.

The economic impact of the American Jobs Plan (AJP) and American Families
Plan (AFP) was the focus of the IMF’s annual economic and policy review of
the United States. After completing discussions with the country’s
authorities, IMF staff issued a statement today summarizing their
conclusions, which will be discussed by the IMF’s Executive Board on July
16.

The AJP and AFP will increase spending and tax expenditures by US$4.3 trillion over the next
decade (about 18.7 percent of 2021 GDP), although the final size and
composition of these plans will be subject to negotiation in the US
Congress. The spending would be partly financed by raising taxes on
corporate profits and high‑income households.

Addressing key challenges

The proposed plans are designed to address a range of challenges that have held back the economy. Many of these challenges have been magnified by the pandemic, which has worsened income inequality and had a disproportionate impact on historically marginalized groups. In this context, the AJP and AFP would make substantial investments in both physical and human capital to help alleviate these disparities and create greater opportunities for economic advancement. Significant investments in infrastructure, research and development, education, childcare, and in-home care would increase productivity and support participation in the labor force. The proposals for a refundable child tax credit, expanded earned income tax credit, and expanded healthcare coverage would reduce poverty and support lower-income groups.

 

The output impact

Overall, IMF staff estimate that the AJP and AFP will add a cumulative 5.3
percent to the level of US GDP during 2022-24, as spending ramps up over
the next few years. This estimate takes into account how different types of
government spending have different ‘fiscal multipliers,’ meaning that they
affect the economy in distinct ways and to varying degrees. For example,
cash transfers to households, such as the child tax credit, are likely to
boost spending in the economy, while childcare support may also increase
participation of parents in the labor force. Spending on the construction
of physical infrastructure, research and development, and education may
raise productivity over a longer horizon.

IMF analysis also shows that there is some uncertainty around the exact
size and timing of these economic effects, which is reflected in the range
of estimates produced by economic models, including the IMF’s G20MOD model
and the Federal Reserve’s SIGMA model.

The inflation and debt sustainability implications

Inflation has been at high levels in recent months, but it is expected to
decline over the rest of this year, as temporary inflationary factors
subside. Starting next year, the proposed fiscal plans are expected to add
moderate inflation pressures. The fiscal packages will be rolled out
gradually over a ten-year window and are expected to boost the supply
capacity of the economy, which will help alleviate concerns that the boost
to demand will fuel underlying inflation. Overall, inflation is forecast to
be around 2.5 percent by end-2022. The US has adequate fiscal space to
implement these spending plans, although additional steps will be needed
over the medium term to bring down public debt.

An inclusive recovery

The US recovery must be inclusive, and its benefits should be shared by all
of society. As the pandemic recedes and the economy rebounds, it is more
important than ever to support communities that have been historically
underserved, marginalized, or affected by poverty. The proposed spending
and tax changes will benefit female-headed households, who make up a
disproportionate share of the poor, as well as Black and Hispanic families.
Research has shown the importance of childcare support, universal
pre-school, and generous “work-based” tax credits in supporting more women,
minorities, and lower income workers to participate in the labor force.
Investment in much-needed physical infrastructure should also benefit
marginalized communities. The boost to productivity that these investments
will produce can support more jobs with sustainably higher wages, in a more
equitable economy.