President Biden sets out an ambitious agenda for the 2022 Budget
The S&P500 increased by 1.2% wow (+12% YtD), the EuroStoxx rose by 1.1% wow (+13% YtD) and the MSCI ACWI increased by 1.4% wow (+10% YtD) in the past week, with Emerging Markets overperforming their Developed Markets counterparts. Commodity prices edged higher with oil prices crossing the $70/brl threshold due to strong demand, as economies around the world reopen.
Investors took a more constructive view on the inflation argument as central banks (Federal Reserve, ECB) continue to call for resolute patience on policy. Moreover, President Biden set a very high bar with its US budget proposal for the Fiscal Year 2022.
Regarding the US Budget proposal, the respective political negotiations are expected to last into Autumn. For Fiscal Year 2022, the planned outlays amount to circa $6 trillion, reflecting mostly the previously proposed American Jobs Plan ($2.6 tn) & American Families Plan ($1.75 tn), alongside an increase of $0.6 tn in nondefense discretionary spending.
Revenues are estimated at c. $4.2 tn, reflecting, inter alia, c. $3.6 trillion of new revenue ($2.9 tn via tax increases and $0.7 tn through corroborating tax enforcement), while also incorporating c. $0.2 tn of budget cuts and savings, mainly regarding defense spending.
The resulting $1.8 tn deficit in Fiscal Year 2022, is estimated at 7.8% of nominal GDP, from -16.7% in Fiscal Year 2021, based on nominal GDP growth of 6.7% for Fiscal Year 2022.
Looking forward, the deficit is estimated to moderate, albeit to a still elevated -4.9% of GDP on average per annum, for fiscal years 2023 to 2031. The federal debt is set to increase from 108% of GDP in fiscal year 2021, towards 117% of GDP by fiscal year 2028 and to stabilize at these levels up to 2031, as interest paid in real terms is significantly lower than real GDP growth.
The Organization for Economic Co-operation and Development (OECD) revised up by 0.2 pps and 0.4 pps, respectively, its global real GDP growth estimates, to +5.8% in 2021 and +4.4% in 2022 following a contraction of 3.5% in 2020, mainly due to the progress in the vaccinations programs against Covid-19.
Recall that for the European Union (EU), disbursements of the Recovery and Resilience Facility funds, which are part of the Next Generation EU, are incorporated in the projections (euro area real GDP growth is expected at +4.3% in 2021 and +4.4% in 2022, from +3.8% in 2021 and +3.8% in 2022 three months ago.
Having said that, all 27 EU countries have now ratified the new Own Resources Decision, which raises the upper limit for national contributions to the EU budget by 0.6 pp to 2.0% of each country’s Gross National Income, and was necessary to allow the EU to borrow on the markets.
The last two pending Member States, Austria and Poland completed the procedure on Thursday, enabling the European Commission to start borrowing in order to finance the €750bn recovery plan within June. The first disbursements (up-front payment of 13% of each member state’s financial contribution) are expected until late July.