US budget deal to aid inflation battle, rating agencies say

A sweeping bill passed by the US Senate on Sunday and intended to fight climate change, lower drug prices and raise some corporate taxes, will bring down inflation over the medium to long term and cut the deficit, rating agencies Moody’s and Fitch Ratings said.

he legislation, known as the Inflation Reduction Act, however, will not bring down inflation “this coming year or next year,” said Madhavi Bokil, senior vice president at Moody’s Investors Service.

Charles Seville, senior director and Americas sovereigns co-head at Fitch, said that 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”.

“We do think that this act will have an impact (of cutting inflation) as it increases productivity,” Ms Bokil said, adding her horizon was two to three years.

The Senate on Sunday passed the $430bn (€421bn) bill, a major victory for President Joe Biden, sending the measure to the House of Representatives for a vote, likely on Friday. They are expected to pass it and send it to the White House for Mr Biden’s signature.

Republicans, arguing that the bill will 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.

Ms Bokil said in the immediate short-term future, inflation was going to be tackled by the 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 will be modest, the bill still has the potential to bring down inflation expectations, according to Wendy Edelberg, a senior fellow in economic studies at Washington think tank the Brookings Institution .

Senate Democrats also said the act will cause a deficit reduction of $300bn over the next decade while the US Congressional Budget Office said the bill would decrease the federal deficit by a net $101.5bn over that period.

The CBO estimated in May that the 2022 federal budget deficit would be $1.036trn.

Asked about how the legislation would impact the budget deficit, Ms Bokil said: “The savings from the Medicare side as well as the tax changes will more than offset the extra cost.”

Mr Seville also said that the bill will 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 the elderly and disabled, to negotiate prices on a limited number of drugs.

Ms Edelberg also said the bill will lead to “greater corporate tax revenue”, which will offset costs and control the deficit.

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