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US president Joe Biden’s legislative priority is a USD1.9 trillion American Rescue Plan aimed at containing the coronavirus and providing economic relief. But how much of the package becomes law by March, when many existing support measures lapse, may depend on whether the new Democratic president receives Republican backing.

He has put consideration of the rescue plan ahead of proposals for investment in infrastructure, research and development, plus clean energy. Congressional negotiations on a second jobs- and infrastructure-focused package might not commence until at least the second half of this year.

The American Rescue Plan follows the Coronavirus Aid, Relief, & Economic Security (CARES) Act, which cost USD1.9 trillion and was signed into law by his predecessor in March 2020, and December’s USD935 billion Response & Relief Act.

A portion of the new plan, with a budgetary cost of USD400 billion, is aimed at COVID-19 containment. This includes USD130 billion to help schools re-open, with flexible resources aimed at allowing reduced class sizes and modifying school rooms to allow social distancing and better ventilation. Additional funds would support vaccinations and testing.

Over half the plan, USD1 trillion, will provide economic relief to households. The CARES Act gave up to USD1,200 to most adults last spring and USD500 to children while the Response & Relief Act gave another USD600 per person in December but with stricter earnings cut-offs; the new plan calls for another USD1,400 per adult or child and now includes payments for adult dependents such as college students.

This USD1 trillion tranche also includes new funds to extend and expand unemployment insurance benefits. Federal payments reached USD25 billion a week between April and July but fell to around USD5 billion by the year end; they could now return to USD10 billion - the equivalent of a boost to disposable income or 0.2 per cent to 0.3 per cent per month.

Another USD440 billion of the American Rescue Plan is aimed at supporting communities, mainly financing state and local-government needs for vaccine distribution, testing and other spending, plus help for small businesses.

The final size of any legislation is unclear, but many of the proposals would impact budget deficits quickly. The federal deficit had been expected to climb from 5 per cent of GDP in 2019 to 16 per cent last year before falling to 9 per cent in 2021 - but that excluded December’s measures, estimated to increase the 2021 deficit by more than USD700 billion.

We were already projecting a federal deficit exceeding 11 per cent of GDP in 2021. As currently proposed, President Biden’s plan could boost the federal deficit by at least USD1 trillion in 2021, or almost 5 per cent of GDP.

However, portions of the package could be scaled down during the legislative process. The Senate is now split evenly between Democrats and Republicans with vice-president Kamala Harris casting tie-breaking votes while Democrats hold a slim majority in the House of Representatives. The ultimate size of any package may depend on the breadth of support on Capitol Hill.

First published 20 January 2021.

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