5.5% GDP growth in 2022 plausible amid budget reconciliation: BofA

The Senate’s passage of a $1.2 trillion infrastructure package bipartisan agreement on Tuesday, Aug. 10, sets the stage to add around $550 billion in new spending to roads, bridges, waterways, public transit, railways, the power grid and broadband internet around the country. According to a Bank of America Global Research (BAC) report by U.S. economist Michelle Meyer published in light of the infrastructure bill, BofA’s forecast of 5.5% real GDP growth for 2022 remains feasible.

“Our baseline forecast of 5.5% real GDP growth next year assumes $2 trillion of new spending,” the report reads. “We think this is still in the ballpark and are awaiting to see how the reconciliation process unfolds.”

Although $550 billion in new fiscal spending over the next five years from the infrastructure bill alone would not meet the mark for BofA’s baseline target of $2 trillion, the Democrats’ $3.5 trillion budget resolution might do just that. The resolution, adopted in the Senate Wednesday morning in a 50-49 vote, could lead to bolstered spending towards the expansion of “human capital” infrastructure — Medicare and federal safety net programs, as well as federal child care, education, and climate change efforts. BofA’s report states that the company will not be amending its healthy economic forecast for next year just yet.

“While we may not see the reconciliation end up with such a high price tag, we expect a bill to be passed with many of the core objectives,” the report reads. “The bottom line: more fiscal expansion is on the way, but this is a very different form of stimulus than the COVID-relief programs.”

And as the infrastructure bill now makes its way to the House, the report noted that the output “multiplier” for infrastructural spending is typically larger compared to other fiscal spending initiatives. With $110 billion being put towards roads, bridges, and other major projects as well as $66 billion towards passenger and freight railways, GDP may be boosted by $50 to $120 for every $100 spent on infrastructure in the medium term, without accounting for pay-fors. This equates to a multiplier of anywhere between 0.5 to 1.2 per historical data, BofA said.

According to BofA, the two primary ways in which infrastructure spending boosts GDP is through the direct effects of spending to subsidize various projects as well as the resulting gains to economic productivity and efficiency.

“Both provide medium-to-long term support for the economy in stark contrast to the immediate lift from the stimulus payments in the COVID relief bills,” the report reads.

Legislators continue to debate over the budget deficit implications the bill will have, with the Congressional Budget Office (CBO) estimating that it will increase the deficit by $256 billion over the next decade.

“The debate seems to be over some of the assumptions of 'pay fors' such as repurposing unused COVID relief funds and using the savings generated by states that terminated unemployment insurance programs early,” the report reads. “There are no changes to corporate taxes, gas tax fees, or fees on electric vehicles.”

In any case, Congress is set to have a busy fall season. BofA proposed a timeline of the infrastructure bill being signed into law by the end of August with the budget reconciliation passing in late-October. Congress will need to pass a continuing resolution by Sept. 30 as well as face the debt ceiling by mid-to-late fall.

Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter: @thomashumTV

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