INSIGHTS AND RESOURCES
Economics of the $1.9 trillion American Rescue Plan Act
INSIGHT ARTICLE |
Authored by RSM US LLP
President Biden on Thursday signed the $1.9 trillion fiscal aid and stimulus package into law. The American Rescue Plan Act will provide a robust tail wind to the domestic economy as it recovers from the pandemic and will most likely boost gross domestic product by an additional three percentage points.
With the added federal spending, we have upgraded our growth forecast for the year to 7.2%, up from 6.1%.
Based on this latest development, we have upgraded our growth forecast for the year to 7.2% (previously 6.1%) and our 2022 growth estimate to 4.8% (up from 3.2%). For 2023, we now expect a 2.9% pace of growth. All of those estimates are well above the long-term growth rate in the United States of 1.8%.
It is critical to point out that we think there is notable risk of much faster growth over the 2021-23 period because of this legislation and the $1 trillion or so of spending still in the pipeline from December’s package.
Based on a quick look at the legislation, roughly 85% of the $1.9 trillion is dedicated to addressing the pandemic, 75% or so is one-time spending and nearly $1.16 trillion of it is designed to be spent this year. Inside that, roughly half of the $680 billion in income transfers this year will be in the form of stimulus checks.
We expect that those checks will boost net household savings, which through the end of January stood at $3.97 trillion, creating the conditions for a household-led economic boom that will almost certainly be the largest in anyone’s lifetime. Policymakers, investors and firm managers should anticipate the best growth in the American economy since the mid-80s and quite possibly since the World War II era.
Perhaps the most ambitious portion of the plan is the major expansion of the existing child tax credit, which provides $2,000 per year for children from birth through the age of 16. Under the new Biden plan, most families will receive $3,600 for each child under the age of 6 and $3,000 per year for each child ages 6 to 17. In our estimation, this represents the most significant expansion of the social safety net in the United States in more than 50 years.
Based on the latest Congressional Budget Office estimate, this will result in a cumulative increase of $1.85 trillion in the federal debt over 10 years. These eye-popping growth estimates are what has been behind the recent move upward in the yield of the 10-year Treasury, which was 1.51% on Wednesday, up from 0.91% to start the year. They have stimulated the debate across financial markets and in policy circles on the risks of an overheating economy and inflation.
While we do expect inflation to increase toward 3% in the top-line consumer price index in mid-2021, mostly because of year-ago base effects linked to the recovery in oil and energy prices, we expect that increase will be transitory. In our view, the top-line inflation number will ease back toward 2% over the next 12 to 24 months. We do not anticipate a permanent increase in the price level nor a change in inflation expectations that results in higher inflation or any significant risk to the economic outlook linked to pricing.
Based on CBO’s scoring of the plan, the major elements of it by size are:
- Stimulus checks
- $402 billion immediate aid
- $393 billion FY 2021
- State and local fiscal aid
- $362 billion immediate aid
- $284 billion FY 2021
- Unemployment benefits extension
- $205 billion immediate aid
- $195 billion FY 2021
- Education aid
- $165 billion immediate aid
- $12 billion FY 21
- Child tax credit increase
- $109 billion immediate aid
- $26 billion FY 21
- Union pension plan aid
- $86 billion immediate aid
- Federal Emergency Management Agency
- $50 billion immediate aid
- $11 billion FY 21
- COVID-19 testing, contract tracing and mitigation
- $48 billion immediate aid
- $10 billion FY 21
- Obamacare COBRA subsidies
- $37 billion immediate aid
- $28 billion FY 21
- Transit grants
- $30 billion immediate aid
- $10 billion FY 21
- Restaurant aid
- $29 billion immediate aid
- $29 billion FY 21
- Child care assistance
- $24 billion immediate aid
- $4 billion FY 21
- Tax credits
- $24 billion immediate aid
- $4 billion FY 21
- Rental assistance
- $22 billion immediate aid
- $8 billion in FY 21
- Other small provisions
- $262 billion immediate aid
- $149 billion FY 21
Call us at +1 213.873.1700, email us at firstname.lastname@example.org or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Joe Brusuelas and originally appeared on 2021-03-11.
2020 RSM US LLP. All rights reserved.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.