Fate of $1.75tn US spending bill centres on growth vs inflation fight

When senator Joe Manchin all but killed Joe Biden’s flagship $1.75tn social spending bill on Sunday, he cited his concerns about rising inflation and the effect the bill would have on the federal deficit.

Now, economists are responding to the conservative Democrat’s intervention by slashing their expectations for US growth.

Having previously forecast that the world’s largest economy would expand next year by 3 per cent in the first quarter, on the expectation that the Build Back Better bill would pass, a team of economists at Goldman Sachs this week downgraded their estimates by 1 percentage point.

Additional cuts were made to the second and third quarters of 2022, underscoring the “negative growth implications” the bank’s staffers flagged from a failure to pass the fiscal package.

Biden cited the Goldman revisions in a speech at the White House on Tuesday, saying: “All the talk about how my Build Back Better plan was going to increase inflation and cause these debts . . . what happened? Goldman Sachs and others said if we don’t pass Build Back Better, we’re in trouble, because it’s going to grow the economy, and without it, we’re not going to grow.

“What happened? Stock prices went way down,” he added. “It took a real dip.” The S&P 500 dropped 1 per cent on Monday, following a similar move on Friday, before recouping the bulk of those losses on Tuesday.

Kathy Bostjancic at Oxford Economics cited the “one-two punch” from both the impasse with Manchin and surging coronavirus cases tied to the new Omicron variant, warning that the aggregate hit could lower growth to about 3.7 per cent for next year, versus the 4.4 per cent pace pencilled in earlier this month.

The drag in 2023 from the failure to pass Build Back Better is likely to be even more significant, she added, lowering real gross domestic product growth to below 2 per cent, with employment 750,000 lower by the end of that year.

“It takes money out of the economy that we thought was going to be in it,” said James Knightley, chief international economist at ING. “That is a loss, and we are going to have to revise down our growth expectations a little bit if that is the case.”

ING’s official forecast predicts the US economy will expand 4.5 per cent next year, but with Omicron raging and Biden’s spending package in peril, Knightley believes that 3.5 per cent is more plausible.

The revisions came just days after Manchin, who represents West Virginia, said he could not support the Build Back Better package, a vast piece of legislation that would make large investments in early childhood education and efforts to combat climate change, among other provisions.

After weeks of direct negotiations with the White House, Manchin told Fox News on Sunday: “I cannot vote to continue with this piece of legislation. I just can’t. I’ve tried everything humanly possible. I can’t get there.”

He has taken issue with both the size and scope of the package, including specific provisions such as the introduction of a four-week paid family and medical leave allowance for all American workers and the extension of tax credits for families with children.

The child tax credit was expanded earlier this year in Democrats’ $1.9tn Covid stimulus bill, giving annual credits of $3,600 per child under the age of six and $3,000 per child between the ages of six and 17.

Economists at Deutsche Bank called the loss of the child tax credit a “key downside risk to consumer spending”, directly impacting income levels in the near-term.

Manchin’s intervention has prompted outrage from Senate and House Democrats alike, stoking divisions and leading to finger-pointing within the president’s party.

On Tuesday, Katie Porter, a progressive House member, released a statement saying: “It’s no wonder why economists are cutting their forecasts for US economic growth following senator Manchin’s comments.

“The Build Back Better Act combats inflation and invests in what we need for a strong, stable, globally competitive economy.”

The White House and Democratic congressional leaders have argued that the $1.75tn bill would tame, rather than add to, inflation by reducing household costs on services such as child care and goods like prescription drugs.

Meanwhile Republican legislators have sought to tie the bill to rising consumer prices, arguing that the unprecedented spending would drive up inflation further. Recent readings show inflation rising at the fastest pace in nearly 40 years.

The majority of economists surveyed in a joint poll conducted by the Financial Times and the Initiative on Global Markets at the University of Chicago Booth School of Business, however, have endorsed a third option, that the social spending package, alongside the recently passed bipartisan infrastructure bill, would have “no material effect” on inflation over time.

“This is not a wall of money hitting the economy in one year. This is spread over a number of years and it is going to take longer to filter through,” said Knightley. “In an economy where there is very vibrant demand and supply-chain constraints, any additional demand is going to add to inflationary pressures, but if it adds to the productive capacity of the US economy, it can actually lower inflation over the longer term.”

Manchin’s obstruction dealt a devastating blow to the White House and Democratic leaders on Capitol Hill, who had planned to pass the bill with only Democratic support. Because Democrats control the Senate, 50-50, with Kamala Harris, vice-president, able to cast a tiebreaking vote, Manchin’s support is essential in order to clinch a majority for the bill.