If you haven’t been following US politics closely, something pretty big happened yesterday: US President Joe Biden’s huge US$1.9 trillion (AU$2.5 trillion) stimulus bill passed the House of Representatives, and has now been signed off into law.
The passage of Biden’s huge stimulus package, dubbed the ‘American Rescue Plan’, has been described as a major legislative victory in his brief time as President, as well as as one of the US’ biggest anti-poverty efforts in decades.
Most of the money will go to assisting lower-income households, as well as billions of dollars that will go towards families, schools, local and state governments, businesses, and more.
The sheer size of this massive US$1.9 trillion package will also have consequences for the global economy – and ripple effects for Australia.
Just how big is this package?
For starters, the American Rescue Plan represents a whopping 8.5 per cent of US’ GDP, which was $20.93 trillion in 2020 – and bear in mind the US is the biggest economy in the world.
Secondly, this package is the third cab off the rank, and follows two stimulus packages worth a combined US$3 trillion that Washington has already approved since the pandemic hit.
The Plan is also not far off from the huge European Union rescue package passed in July 2020 valued at €1.8 trillion (US$2.15 trillion or AU$1.54 trillion). The EU package was the biggest to ever be financed through the European Union budget, according to the European Commission.
In Australian terms, the American Rescue Plan is 25 per cent larger than Australia’s annual GDP of around $1.8 trillion.
What’s in the US$1.9 trillion American Rescue Plan?
It’s a lot of money, but there are a few key tenets of the plan. Here’s a quick summary of some of the major ones:
- US$1,400 checks for every taxpayer if you’re single, or US$2,800 if you’re a married couple. This will taper off and then cut off entirely for those who make US$80,000 and above (or US$160,000 for married couples). This would be the third stimulus check issued to Americans since the pandemic hit, after US$1,200 and US$600 cheques were approved last year.
- The existing US$300 weekly unemployment benefit boost will be extended. The existing boost is set to expire in mid-March.
- The child tax credit will be increased, which will give parents of children under 18 a year’s worth of monthly benefits of US$200-300 and help offset day-to-day family costs.
- US$350 billion will be issued to states, cities, tribal governments and US territories after many communities took a hit to their tax base during the pandemic.
- Schools will receive US$130 billion that will go to reducing class sizes and modifying classrooms for social distancing, as well as buying personal protective equipment and hiring staff like nurses, counsellors and janitors.
- US$50 billion will be dedicated to expanding COVID-19 testing, improving contact tracing, setting up labs, mobile testing units, and speeding up distribution and administering of COVID-19 vaccines.
- Rental and housing help of US$30 billion will go towards assisting low-income households pay rent as well as assisting homeowners struggling with mortgage payments.
- Restaurants and bars will get US$28.6 billion, with this sector one of the most hard-hit by the pandemic.
What does it mean for Australia?
Such a huge sum of money will improve the US’ economic growth, and with America still the biggest economy in the world, this means an improvement in global growth overall, economists said.
“The US is still the engine of the global economy and the engine is about to be fired up,” EQ Economics principal Warren Hogan told Yahoo Finance.
“The package will give US domestic demand a boost which will have a positive impact on Australian exports to the US including our wine exporters that are suffering from high tariffs into the Chinese market.
“A stronger US economy is always a positive for the Australian economy through various channels including business confidence, stock market valuations and the currency.”
Independent economist Stephen Koukoulas said the support package was “good economic news all round”.
“For now, it is exactly the right policy: job and an economic recovery,” he told Yahoo Finance.
“Medium term, it means US government debt is huge and that is something that will require attention, but only when the US economy is back to full health.”
JP Morgan Asset Management global market strategist Kerry Craig said the Reserve Bank should watch for a widening gap between US and Australian bond yields.
“Bond yields in the US that are higher than Australia may see the U.S. dollar rise, or at least stop falling, and ease some of the appreciation in the Australian dollar, aiding the rebalancing of the Australian economy,” he told Yahoo Finance.
“Rising bond yields should add to, or reinforce, the rotation in equity markets towards cyclical or value sectors such as financials.”
Why some economists are concerned
“Overheat”: this word has been used often by economic experts, and Biden’s critics, who are concerned about this amount of money being flushed into the American economy.
“The risk is that [the US$1.9 trillion package] may be too much and cause the US economy to overheat,” said AMP Capital chief economist Shane Oliver.
Stock markets have jittered in recent weeks amid investor fears that the bill would lead to an increase in inflation, which is a consequence of a recovering economy, or general price rises that can come from extra public spending.
Former US Treasury Secretary Larry Summers believes it would “set off inflationary pressures of a kind we have not seen in a generation, with consequences for the dollar and financial stability”.
Oliver added: “Excessively strong growth in the US could cause a faster pick up inflation and earlier monetary tightening which is what bond markets have been worried about and why bond yields have increased.”
Higher inflation is contained by one key thing: interest rates. However, the financial systems of the world have been used to a low interest rate environment for quite some time now, and higher rates would have negative impacts on the global stock market as well as emerging economies.
However, Biden’s economic advisor has argued that the stimulus plan won’t overheat the economy as feared.
Additionally, stock markets have known about Biden’s plan for a while now and have factored it in, Oliver noted, with Wall Street actually reaching new record highs overnight.