Biden’s $6 Trillion Budget Is Here. What It Means For Markets.

By Daren Fonda

The market appears to be taking a wait-and-see approach to President Joe Biden's first budget. / Chris Kleponis/CNP/Bloomberg

President Joe Biden  unveiled his first budget to Congress on Friday, asking for $6 trillion in spending for 2022, escalating to $8.2 trillion in 2031. 

It’s an ambitious 10-year plan to increase government spending by trillions of dollars, while raising a host of new taxes, in a bid to remake the U.S. economy.

Yet the market’s reaction has been to shrug it off. 

Stocks continued to rally on Friday after the budget came out with the  S&P 500  gaining 0.3%. 

Bond yields even fell a bit with the 10-year Treasury note at 1.58%.

At 72 pages, plus a 1,422-page appendix and 246-page analysis, the president’s budget presents a blueprint for his economic and social agenda. 

It assumes that Congress passes Biden’s two big legislative initiatives: the American Jobs Plan and the American Families Plan. 

Amid the tables, charts, and forecasts are also plenty of political aspirations—from revitalizing manufacturing and the “care economy” to free college tuition, expanded child tax credits, and green energy.

Near-term, the president is asking for an 8.6% increase in military and discretionary spending to $1.5 trillion for fiscal 2022. 

The rest of the budget goes to non-discretionary spending like Medicare and Social Security, along with emergency programs for Covid-19 relief. 

The long-term goal is to spend more than $4 trillion on infrastructure and social programs, much of it outlined in the aforementioned legislative plans.

The budget also includes initiatives to raise corporate and individual taxes. 

The proposed overhaul of corporate taxes, including an increase in the tax rate from 21% to 28%, would raise nearly $2.1 trillion over a decade, the White House forecasts. 

Closing corporate tax loopholes would contribute $64 billion, and the administration aims to raise $779 billion overall from enforcing Internal Revenue Service rules more stringently.

Biden’s plans also include an increase in the top marginal capital-gains tax rate to 43.4% on household income over $1 million, according to The Wall Street Journal, and a new tax on unrealized gains of individuals’ estates, with a $1 million exemption. 

The proposed changes to the capital-gains taxes alone would raise $322 billion overall.

As with most White House budgets, Biden is making some optimistic assumptions about the economy, inflation, and interest rates. 

The budget assumes that real gross domestic product growth will average 2.4% for the next decade, in line with some private estimates and the Federal Reserve’s forecasts, but above the 2.2% forecast by the Congressional Budget Office.

The White House also sees unemployment dropping faster than CBO forecasts over the next few years, and it sees inflation contained at 2.4% in the long run. 

The White House sees only modest gains in short- and medium-term interest rates, topping out at 1.7% through 2027. 

That would be slightly above the current 10-year Treasury yield.

None of this means the U.S. won’t continue to rack up large deficits. 

Biden sees the deficit falling to 4.6% of GDP in 2027, down from an estimated 16.7% in 2021. 

The deficit would then hold around that rate until 2031.

The revenue shortfalls would push up the U.S. debt sharply. 

Outstanding U.S. debt would increase by 50% over the next decade, adding $14.5 trillion to bring the total to $33.4 trillion. 

The U.S. economy would also grow by an estimated 52%. 

But public debt as a percentage of GDP would still increase, reaching 117% in 2031, up from an estimated 111.8% in 2022, according to White House forecasts.

These are all huge numbers that, in other economic circumstances, might be perceived negatively by the markets. 

But that isn’t happening now for several reasons.

One is that the near-term outlook is looking robust as businesses reopen and consumer spending ramps up with stimulus checks flowing through. 

With about half of U.S. adults now fully vaccinated—and on track for 70% by July 4—the market is looking forward to a strong second half of the year for corporate profits.

Fiscal policy is also competing against a host of other factors, including inflation data, interest rates, monetary policies, and international trade. 

And as Barron’s has noted, the markets are being supported by plenty of liquidity from the Fed.  

“The markets have been rigged by a lavish excess of money,” says strategist Ed Yardeni of Yardeni Research. 

He’s still bullish on stocks, he says, because the positive fundamentals are outweighing the negatives.

Overall, the market appears to be taking a wait-and-see approach to what emerges from Congress. 

Democrats will have to thread a needle through a closely divided House and Senate. 

In the Senate, there isn’t room for even one defection by Democrats, assuming no Republicans support the proposal.

Expect a long, hot political summer as lawmakers battle it out.

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