A sweeping bill passed by the US Senate on Sunday and intended to fight climate change, lower drug prices and raise some corporate taxes, would bring down inflation over the medium to long term and cut the deficit, rating agencies Moody’s Investors Service and Fitch Ratings said on Monday.
However, the legislation, known as the Inflation Reduction Act, would not bring down inflation “this coming year or next year,” Moody’s senior vice president Madhavi Bokil said.
The legislation was disinflationary, “but for all the rebranding of the legislation, the impacts on inflation are relatively small and will only really start to compound over the medium and long term as these provisions take effect,” said Charles Seville, senior director and Americas sovereigns cohead at Fitch.
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“We do think that this act will have an impact [of cutting inflation] as it increases productivity,” Bokil said, adding that her horizon was two to three years.
The Senate on Sunday passed the US$430 billion bill, a major victory for US President Joe Biden, sending the measure to the House of Representatives for a vote, likely on Friday.
The House is expected to pass it and send it to the White House for Biden’s signature.
LEFT-WING WISH LIST?
Republicans, arguing that the bill would not address inflation, have denounced it as a job-killing, left-wing spending wish list that could undermine growth when the economy is in danger of falling into recession.
Bokil said in the near term, inflation was going to be tackled by the US Federal Reserve as it raises rates.
Inflation expectations are a key dynamic being closely watched by Fed policymakers, as they aggressively raise interest rates to contain price pressures running at four-decade highs.
While the short-term impact of the legislation on inflation would be modest, the bill still has the potential to bring down inflation expectations, Wendy Edelberg, a senior fellow in economic studies at Washington think tank the Brookings Institution, said in an e-mail on Monday.
Senate Democrats also said the act would cause a deficit reduction of US$300 billion over the next decade, while the US Congressional Budget Office (CBO) said the bill would decrease the federal deficit by a net US$101.5 billion over that period.
The CBO estimated in May that this year’s federal budget deficit would be US$1.036 trillion.
Asked how the legislation would impact the budget deficit, Bokil said: “The savings from the Medicare side as well as the tax changes will more than offset the extra cost.”
Seville also said that the bill would reduce deficits and help contain rising healthcare costs.
The legislation aims to reduce prescription drug costs by allowing Medicare, the government-run healthcare plan for elderly and disabled people, to negotiate prices on a limited number of drugs.
HIGHER TAX REVENUE
Edelberg also said the bill would lead to “greater corporate tax revenue than we otherwise would see,” which would offset the cost and control the deficit.
Moody’s said that the spending bill was complementary to another bill recently passed by Congress, which aims to subsidize the US semiconductor industry and boost efforts to make the US more competitive with China.
“They move in the same direction, so the Chips Act will also help with alleviating some of the supply chain issues,” Bokil added.
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