Biden to take presidency with highest debt and deficit since Second World War

10 Nov 20

US president-elect Joe Biden faces some of the worst economic conditions in 70 years, ratings agency Moody’s has warned.

 

The Democrat challenger’s victory over Donald Trump was declared on Saturday and, although Trump is contesting the result, Biden has begun work on his transition to power.

Moody’s identified several “key challenges” Biden will face, including the weak economy and fragile recovery, Covid-19 and healthcare access, increasingly tense relations with China, record-high deficits and rising government debt, and climate change.

“Biden’s presidency will start in the context of fiscal deficits and debt levels at highs not seen since World War II,” the Moody’s report stated.

“While we expect fiscal policy to remain accommodative as long as economic conditions are weak, the challenge for his administration will be how to phase out fiscal stimulus measures once the economy recovers, and how to finance proposed spending priorities without further weakening the government’s fiscal position in the short term.”

In the medium term, he will need to stabilise the rising debt trajectory, Moody’s added.

Biden plans to provide direct support to households while economic conditions remain weak, and has proposed expanding healthcare access.

His healthcare plans are likely to be ‘credit-positive’ for state and local governments, Moody’s said, because increased access to coverage will probably lower the costs associated with uncompensated care, and a public option that is cheaper than private insurance will reduce government spending on employees’ health insurance.

The extra stability given to low- and middle-income households by expanding access will also likely reduce state and local government spending on other social safety net programmes.

Biden’s economic recovery plan includes a $2trn investment in green infrastructure projects, and he also eventually plans to raise corporation taxes, although the report suggested he will wait to do this until the economy recovers.

Although Trump has claimed Biden won fraudulently, Moody’s expects the resolution of his disputes will increase short-term financial market volatility but will otherwise have no enduring economic impact.

However, the increased political polarisation in the US, highlighted by the contentious election, could exacerbate the divide between Republicans and Democrats and make it more difficult to enact policies, especially given close results in the country’s senate and house of representatives, it added.

Investment bank Goldman Sachs said it expects a $1trn stimulus package, possibly enacted before Biden’s inauguration in January.

“While this is less than half of what might have been seen under a Democratic sweep in the election, it should suffice for a small positive fiscal impulse to US growth in coming quarters,” a research note said.

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