A Narrowly Democratic Congress Could Boost Spending and Growth

With a narrowly Democratic Congress, U.S. fiscal spending is likely to increase on economic relief from the pandemic, infrastructure, and healthcare, boosting the economic rebound.

Winning two Georgia Senate races gives Democrats control of the U.S. Senate by the narrowest of margins – and for the fourth time in the history of the Republic there will be a 50–50 Senate with Vice President-elect Kamala Harris able to cast the 51st vote.

What can we expect from a unified, albeit narrowly, Democratic Washington? We expect more spending on COVID-19 relief in the near term with a longer-term focus on “economic rebuilding,” a central message of President-elect Joe Biden’s campaign, which could include an infrastructure bill, healthcare, and other non-economic priorities such as a voting rights bill. However, as we move from campaign rhetoric to the realities of policymaking, investors should prepare for the invariably bumpy and slow process of passing comprehensive legislation, especially with a 50–50 Senate.

Fiscal priorities for 2021

We believe that with control of Washington in 2021, the Democrats will likely focus on four fiscal priorities:

  • More COVID relief: An additional round of COVID stimulus will likely be the Biden administration’s first priority, with a deadline of mid-March when many of the provisions in the $900 billion (roughly 4% of U.S. GDP) December-passed COVID bill expire. No one knows for sure how big a bill will be signed into law, but given the virus’s trajectory and the bumpy rollout of vaccinations, in our base case we think relief will probably be in the $1 trillion range – but it could be higher (or a touch lower). The size and speed of passage will depend on how Democrats choose to pass the bill – whether it is through “regular order” in the Senate (which requires 60 votes) or through a process called “reconciliation,” which has numerous strings attached, but only requires 50 votes. Additional support for households and small businesses impacted most severely by the pandemic (similar to the most recent stimulus) would almost immediately invigorate economic activity, in our view, while additional support for state and local governments could help avoid the longer-term drag state budget cuts had following the financial crisis.
  • Infrastructure focused on economic recovery: The Biden campaign’s “Build Back Better” slogan is likely to manifest as an economic recovery and job-creation plan focused on infrastructure spending. Democrats are envisioning a broad definition of infrastructure – not just roads and bridges, but also a national broadband network, green energy, and school investment. However, such a comprehensive bill with its many committees of jurisdiction would require significant work – and bipartisanship – in Congress. Consequently, we think infrastructure legislation would be a focus in the second half of 2021 at the earliest, and even then, it may take longer to pass. While the devil will be in the details, this type of spending has the potential to have more lasting economic benefits than targeted aid, and could increase productivity (and maybe inflation) in the longer run. Infrastructure and related spending would likely be in the range of $1 trillion – $2 trillion (4.5%–9% of GDP), most likely spread out over several years.
  • Healthcare spending: Democrats flipped the House in 2018 by campaigning on healthcare, and that messaging seems to have resonated even further in 2020 amid the pandemic. As a result, we think shoring up the Affordable Care Act (ACA) will be a major Democratic priority, with new urgency given the pending case in front of the Supreme Court and recent changes to the court’s composition. Since the more revolutionary “Medicare for All” approach lacks broad-based support, we expect Democrats to focus on changing the existing framework to put the ACA on firmer legal footing, make it more affordable for middle income earners, and allow Medicare to negotiate drug pricing with pharmaceutical companies. We estimate the total cost of such a bill would be roughly $500 billion – $700 billion (3%–4% of GDP). We expect the Democrats to try to pass these changes with reconciliation.
  • Tax hikes would finance higher spending: Although the Biden campaign has proposed nearly $4 trillion in tax hikes to offset some of the spending, the reality of trying to raise taxes in a time when the U.S. economy is still recovering from a sharp recession means that tax changes will likely be more evolutionary than revolutionary. Raising the corporate tax rate to 28% as Biden has proposed will likely be difficult given the narrowly divided Congress; instead, we think the corporate tax rate may land at a more modest 24%–25%. Even more likely, Democrats could focus on alternative ways to raise revenue through corporate taxes that are more politically popular, such as an alternative minimum tax or adjustments to the GILTI tax (on global intangible low-taxed income). While it’s still unclear exactly what the priorities will be, we think these types of changes could raise $500 billion – $700 billion in revenue.
  • On personal taxes, we expect the focus to be on raising taxes only for top earners. The top tax bracket is likely to go back to 39.6%, which would raise approximately $500 billion over 10 years. Other changes, such as reducing the estate tax exemption, abolishing the step-up in basis, and increasing capital gains for those making more than $1 million per year are possible sources of revenue as well, but could also face some of the legislative realities of a narrowly divided Senate. We could also see a Democratic Washington reinstate the SALT (state and local tax) deduction in some capacity (either in its entirety or simply by increasing the current $10,000 deduction), a welcome development to many residents in high-tax states.

    All in all, we expect tax increases could reach $1 trillion – $1.5 trillion over 10 years, but even if passed in 2021 they won’t likely take effect until 2022. Investors wondering whether they will see rapid and revolutionary changes in tax policy coming from a Democratic-majority Congress should probably temper these expectations.

Implications for the economic outlook

Despite the pandemic’s drag on the economic recovery over the last few months, the combination of an improving public health outlook and significant fiscal stimulus leads us to expect U.S. growth to reaccelerate sharply this year, far surpassing consensus estimates heading into the Georgia election. An additional $500 billion – $1 trillion of spending, for example, could add 2.5–5.5 percentage points to a no-new-stimulus baseline GDP growth projection of more than 4% in 2021. Though the timing and details of spending will be an important determinant, net government spending could boost real U.S. GDP growth to over 7% in 2021. The $900 billion of stimulus passed in December is designed to filter into the economy quickly, and should also help bridge the gap between near-term economic weakness and a better public health outlook later in the year. While the additional fiscal stimulus boost is likely to produce an even stronger-than-previously-expected U.S. growth rebound in 2021, it’s likely to have more moderate effects on inflation amid the lingering effects of the coronavirus-induced recession. Inflation lags growth and improvements in the labor market, and still isn’t likely to reach 2% this year.

The key remaining uncertainty is the impact these policy changes will have in the longer run. The details of any infrastructure package will dictate any productivity or labor supply gains, and these factors, as well as any tax changes that are able to get through Congress, will impact the longer-run growth and deficit outlook for the U.S. While we still see limited near-term inflation pressures, larger fiscal stimulus increases right-tail inflation risks in the longer run, particularly given the Fed’s desire to tolerate higher inflation.

To learn more about the economic and investment implications of a changed Washington, please visit our U.S. election website.

Libby Cantrill is PIMCO’s head of public policy, and Tiffany Wilding and Allison Boxer are PIMCO economists.

The Author

Libby Cantrill

Executive Office, Public Policy

Tiffany Wilding

North American Economist

Allison Boxer



The Long Climb

The Long Climb

While a near-term mechanical bounce in economic activity in response to the lifting or easing of lockdown measures looks likely, we expect the subsequent climb up to be long and arduous.


PIMCO Europe Ltd
11 Baker Street
London W1U 3AH, England
+44 (0) 20 3640 1000

PIMCO Europe GmbH Irish Branch,
PIMCO Global Advisors (Ireland)
3rd Floor, Harcourt Building 57B Harcourt Street
Dublin D02 F721, Ireland
+353 (0) 1592 2000

PIMCO Europe GmbH
Seidlstraße 24-24a
80335 Munich, Germany
+49 (0) 89 26209 6000

PIMCO Europe GmbH - Italy
Corso Matteotti 8
20121 Milan, Italy
+39 02 9475 5400

PIMCO (Schweiz) GmbH
Brandschenkestrasse 41
8002 Zurich, Switzerland
Tel: + 41 44 512 49 10

PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. BR022803) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the Securities Institutions Act (WplG). The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication.| PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH- . The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

First the Election, Now the Governing: Fiscal Policy Priorities, Challenges, and Implications
XDismiss Next Article