Choosing between the two candidates will mainly mean choosing between a bigger or smaller federal government. Joe Biden’s economic platform aims at being more redistributive, with a likely net rise of USD3.7trn in taxes over the decade, mostly affecting the highest income earners. It is also demand-side oriented: A Biden win could see public spending rise by USD6.4trn at the horizon of 2030. In contrast, the incumbent U.S. president offers supply-side oriented propositions, including USD3trn of net spending cuts at the horizon of 2030, coupled with USD1.4trn of tax cuts, causing a USD1.1trn net cut in overall government receipts.
What will this mean for short-term growth? As Biden’s platform also emphasizes improvements in infrastructure, which is usually associated with the highest multipliers that real activity can benefit from, his victory could result in an extra 1pp of real economic growth in 2021. This supplementary boost should increase until 2024, reaching at least 1.5pp, 2.3pp and 2.2pp of real growth contribution in 2022, 2023 and 2024, respectively. A Trump victory would sustain real economic growth by 0.9pp in 2021, 0.7pp in 2022 and 0.3pp in 2023 as a result of the recovery infrastructure package in the short to medium term. After that, the negative impact of the long-term spending cuts would offset the positive impacts of tax cuts.
Over the long-term, public debt will be the real winner of this election. It should reach 159% of GDP at the horizon of 2030 (compared with 137% expected in 2020), a trajectory which is common to the two candidates despite radically different economic orientations (public debt at 151% of GDP at the horizon of 2030 in the case of a Trump win).
In our view, political choices in terms of reshoring or redistribution will not create a new regime of very high inflation. We expect a slight overshoot of the 2% target between end -2022 and the beginning of 2023, and a stabilization close to 2% thereafter.