Build Back Better spending would peak in early years, revenue later

Bonds

If the Build Back Better legislation under consideration in the Senate becomes law, the cash would start to flow in late 2022 and peak in 2025.

In reports released this week, Moody’s Investors Service and Fitch Ratings outlined the expected cash flow of the bill and its impact on the fiscal and economic position of the U.S.

Moody’s said the package would have a limited impact on inflation, in part because inflationary pressures are expected to have diminished by late 2022, when spending begins to ramp up. Inflation remains a key concern for markets, including the municipal bond market.

Fitch said the bill’s spending and tax cuts would occur over the near term while the “pay-fors,” or revenue raisers, are back-loaded.

“The impact on spending peaks in FY25, while the tax and other measures in the bill start to raise more substantial revenues in FY26,” Fitch said in a Nov. 22 credit commentary.

President Joe Biden’s domestic agenda is outlined in the new $1.1 trillion infrastructure package, which he signed into law on Nov. 15, and the $1.7 trillion Build Back Better legislation now headed to the Senate. Photographer: Munshi Ahmed/Bloomberg

Munshi Ahmed/Bloomberg

The House on Nov. 19 passed the Build Back Better package, which, along with the newly enacted $1.1 trillion infrastructure bill, encompasses President Joe Biden’s domestic agenda. The Congressional Budget Office sizes the House’s BBB version at $1.7 trillion. The bill now heads to the Senate, which is expected to impose its own changes, though Moody’s said it expects any final legislation to still total around $1.7 trillion.

Biden on Nov. 15 signed the infrastructure bill into law. Combined, the bills translate into $2.2 trillion in new federal government spending on physical infrastructure, human capital, climate resilience, and social safety net programs over the next 10 years, Moody’s said.

“State, local governments and other public sector issuers such as mass transit authorities, are likely to be among the biggest beneficiaries of the increase in federal spending on climate resilience, education, healthcare and infrastructure,” Moody’s said. “High-tax states would especially benefit from the increased state and local tax deduction cap.”

The House version would increase the current SALT deduction cap to $80,000 from $10,000.

The CBO has said that the bill would add $117 billion to FY22 spending and $144 billion in FY23. The combined revenue provisions are negative in the early years, Fitch noted.

On the spending side, the cash peaks in FY25 at $252.6 billion, according to Fitch. It declines to $233 billion in FY26 and drops down to $87.2 billion in FY31.

Revenues, meanwhile, begin in negative territory, at $-37.6 billion in FY22, then steadily climb, roughly matching FY27 revenues at $215.8 billion and ending at $249.7 billion in 2031.

Fitch said it expects additional spending from BBB and the infrastructure bill will add $200 billion, or 0.8% of the GDP, to the CBO’s baseline federal government spending for fiscal year 2023 and 2024.

The CBO estimates that BBB would raise the deficit by $387 billion over 10 years, though that number does not include stepped-up IRS enforcement, which the White House has argued will bring in up to $480 billion over 10 years.

Fitch said it expects U.S. growth to slow in 2022 but remain above historical average due in part to the stimulus effects of the new bills.

“In the short run, the impact on public finances is limited,” Fitch said. “The longer-term impact of BBB on growth will depend on how much the bill improves productivity and labor supply. Provisions such as universal childcare would be positive in this regard. At the same time, higher corporate taxes is a key factor explaining the small or negative growth effects that characterize some private sector estimates of the bill.”

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