It is expected that Biden’s infrastructure plan will still need to be passed by way of “budget reconciliation” and may be implemented in September/October at the earliest, starting in 2022. Tax increases may hedge the positive economic boost from infrastructure, and there is little risk of economic overheating. For the market, the short-term infrastructure bill will raise the risk appetite of the market, favorable risk assets, it is recommended to focus on advanced manufacturing, green infrastructure, emerging technology sectors and other industries.
▌ Biden proposed an 8-year infrastructure plan totaling more than $2 trillion, which will be financed through tax increases. On April 1, Beijing time, Biden gave a speech in Pittsburgh, the starting place of the 2019 campaign, and formally announced an infrastructure investment plan and a tax increase plan. Biden proposed to complete infrastructure investments totaling more than $2 trillion over the next eight years, and will increase federal government revenue by about $2 trillion over the next 15 years by raising the corporate tax rate, which basically covers the scale of infrastructure spending and will permanently reduce the deficit. The announced infrastructure bill is the first part of Biden’s massive infrastructure plan, the second part will be announced in the middle to late April in the future, mainly containing “social infrastructure” and for the individual tax code part of the content, the two parts add up to a total spending scale of about $3 trillion. The plan aims to improve the level of U.S. infrastructure, increase employment, and through some long-term arrangements to promote the development of new industries, increase potential productivity, and create a more level playing field.
▌ The size of the investment in traditional infrastructure is around $800 billion, which is expected to average $50-$100 billion per year. According to Biden’s plan, we estimate that the total stimulus scale of traditional infrastructure is around $800 billion, mainly including investment in traditional transportation facilities (about $450 billion) and building construction and renovation (about $350 billion). Specifically, transportation facilities include highways ($115 billion), public transportation ($85 billion), subways and railroads ($80 billion), airports ($25 billion), waterways and ports ($17 billion); building construction and renovation includes residential and commercial building renovation ($231 billion), school construction ($100 billion), etc. Since the program will last for 8-10 years, we expect that the scale of investment into traditional infrastructure will be around $50-100 billion per year, and the pull effect on the economy and inflation will not be particularly obvious.
▌ The scale of investment in advanced manufacturing, green infrastructure, and emerging technologies is more than one trillion dollars. More than half of the Biden-based construction program is for the support of emerging technology areas, mainly involving advanced manufacturing, new energy, and emerging technology inputs, industrial infrastructure support. Advanced manufacturing-related investment of about 300 billion U.S. dollars; basic technology research will invest 180 billion U.S. dollars; green infrastructure and emerging technologies totaling about 620 billion U.S. dollars, including investment in the electric vehicle industry (174 billion), clean energy procurement (46 billion), broadband and grid construction (200 billion), clean water treatment (110 billion) and related workforce skills training ( 100 billion). This fully reflects the Biden administration’s high priority for advanced manufacturing, green energy, and emerging technology sectors.
▌ Biden proposed that infrastructure spending would be financed primarily through tax increases. Tax increase financing mainly comes from the Made in America Tax Plan, which will increase federal revenues by about $2 trillion over the next 15 years. One of the main additions comes from raising the corporate tax rate, which is planned to increase from 21% to 28%, which we estimate will bring in around $800 billion to $1 trillion in tax revenue over the next 10 years. Meanwhile, Biden plans to raise the global minimum tax rate for U.S. multinational corporations from 10.5% to 21%, and proposes that other countries uniformly adopt a global minimum tax rate system for multinational corporations to prevent some countries from improving their corporate competitive advantage by lowering their tax rates. In addition, the second part of the infrastructure plan to be announced in April is expected to be financed by targeting higher-income groups with tax increases.
Biden’s infrastructure plan is still expected to be passed in a “budget reconciliation” manner, and may land in September/October at the earliest. This time Biden will infrastructure bill and tax increase plan package announced, is expected to be fierce opposition from the Republican Party. The Republicans, led by Senate Republican Leader Mitch McConnell, have repeatedly expressed their opposition to tax increases; and with the upcoming midterm elections in 2022, conservatives within the Democratic Party may not fully support his tax increase bill for the sake of votes. If Biden wants to raise taxes to cover infrastructure spending, the probability of getting 60 votes in the Senate is extremely small. We expect that Biden will still need to use the annual “budget reconciliation” (only 51 votes in the Senate to take effect) to move forward afterwards, and may send the bill to Congress for a vote in September-October this year (the new fiscal year) at the earliest, with implementation starting in 2022.
▌ Tax hikes may hedge against a positive boost to the economy from infrastructure, with little risk of economic overheating. The scale of the current Biden infrastructure bill is not as high as expected, especially in the traditional infrastructure sector, and the annual spending scale of $50-100 billion is not as significant a boost to the economy and inflation as expected by the market. Based on the median fiscal multiplier of 1.2 times, Biden’s infrastructure plan is expected to boost GDP growth by 1.5 percentage points in 2022, but Biden’s tax increase will hedge part of the GDP boosting effect. In our judgment, the risk of sustained overheating in the U.S. economy this year is low, and the high point of inflation in the U.S. is expected to occur in May, mainly due to the base and the supply and demand gap. This year, the U.S. economy is overheating and inflation is expected to rise sharply will gradually correct, investors also do not need to worry too much about the risk of tightening overseas liquidity.
▌ Market impact: For the market, the short-term infrastructure bill proposed will raise the market’s risk appetite, favoring the relevant risk assets. For pro-cyclical assets, the short-term is still in the logic verification period, is expected to maintain relatively good performance, but the space for general rise is relatively limited, the structure needs to pay more attention to the degree of performance delivery. And with the gradual easing of liquidity concerns, the early sharp pullback of interest rate sensitive assets also face some repair opportunities. Industry, it is recommended to focus on advanced manufacturing, green infrastructure, emerging technology areas and other areas of investment opportunities.
▌ Risk factors: Repeated epidemic and less than expected effectiveness of vaccines; unanticipated or unexpected tightening of policies.