Inflation Reduction Act ‘will have no measurable impact on inflation,’ economists say
President Biden recently signed the Inflation Reduction Act (IRA) into law with the goal of taming inflation and addressing climate, tax, and health care issues.
According to economists, however, the $430 billion price tag over the next 10 years is a hefty amount for what they consider to be marginal economic returns.
"Our preliminary analysis of the 'Inflation Reduction Act' (IRA), a climate, tax, and health-focused bill, shows it will boost the level of GDP by about 0.2%-0.3% by the end of 2031 and, despite its name, will have no measurable impact on inflation," Oxford Economics economists wrote in a new note.
The IRA is a slimmed-down version of Biden's original $4.5 trillion Build Back Better plan that focuses on driving down inflation, which hit record numbers in 2022.
Though economists at Wells Fargo agreed that the IRA's actual effect on inflation would be minimal.
"In our view, the IRA will not have a major impact on the outlook for the U.S. macroeconomy over the next year or two," the economists wrote in a separate note. "A tightening of fiscal policy can be disinflationary by slowing aggregate demand growth. The IRA does impose some fiscal tightening, such as the 15% minimum tax on corporations' financial statement income and the 1% excise tax on stock buybacks. However, these new taxes are relatively small, amounting to just 0.1% of GDP per year."
'Little impact on consumers'
While the IRA makes significant strides in both climate goals and lowering health care costs, many of its components don't take effect right away, a major disinflationary headwind.
"For example, the drug price negotiation program for Medicare does not take effect until 2026," Wells Fargo economists said. "In addition, the extension of the expanded Affordable Care Act subsidies act as a small boost to inflationary pressures by extending a consumer subsidy that was set to expire."
Oxford Economics also noted that while the IRA enables Medicare to negotiate drug prices, that provision only applies to a handful of drugs that don't have generic alternatives and won't take effect until 2026.
"From then until 2029, the number of key drugs subject to negotiations will double from 10 to 20," they stated. "While this will save the government money, we believe that pharmaceutical companies will seek to recoup their lost revenue by raising the drug prices for those covered by private plans. Consequently, this will have little impact on consumers or their spending overall."
Still, when combined with the recently passed CHIPS and Science Act and the Bipartisan Infrastructure Law passed in 2021, the passage of the IRA marks "unprecedented, sizable investments in the climate agenda," the economists added.
Roughly $370 billion in the IRA is allocated toward clean energy and climate initiatives. Oxford Economics estimated that the overall GDP multiplier for the expenditures would be "around 0.7, less than 1" but would still add 0.6% to GDP by the end of 2031 "given the sizable amount of tax incentives offered and increased spending."
The new bill implements a 15% minimum corporate tax and a 1% tax on stock buybacks, which is estimated to raise $273 billion. Oxford Economics projected that this would negatively affect GDP by 0.3% by the end of 2031 but would be "more than offset by the approximate 0.6% increase to GDP generated by increased climate-related investment."
Overall, the IRA would raise $750 billion in revenue and reduce the federal deficit by roughly $320 billion over 10 years.
A projection from the Penn Wharton Budget Model estimated that the IRA would "very slightly" increase inflation until 2024 and then decrease it thereafter.
Marc Goldwein, senior director at the Committee for a Responsible Federal Budget, acknowledged to Yahoo Finance that while the IRA won't "get us from 9% inflation down to the 2-3%" target range for the Fed, it will make the Fed's job "just a little bit easier so that they can fight inflation with fiscal policy moving in the same direction."
The Wells Fargo economists agreed that it all comes down to the Fed.
"On net, and when viewed against the $24 trillion annual size of the U.S. economy, we doubt these fiscal policy changes will move the needle much on the inflation front, leaving the Federal Reserve as the main driver of inflation-fighting policy change," they wrote.
Ethan is a writer for Yahoo Finance.
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