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Sunday, June 27, 2021
Possible Impact of the U.S. Infrastructure Plan
ANBOUND

On June 24, U.S. President Joe Biden and some centrist senators reached a historic agreement on a USD 1.2 trillion infrastructure plan. Both political parties in the United States have reached an agreement on the long-sought renovation of the U.S. transportation, water supply and broadband infrastructure. The U.S. Congressmen and the White House will work to ensure that the plan is approved in a bipartisan Congress. President Biden shared that the meeting with the lawmakers went well and that both parties have made several compromises to reach to a mutual agreement.

According to the statement from the White House, the eight-year proposal includes USD 109 billion for roads, bridges and other major projects; USD 73 billion for power infrastructure; USD 66 billion for passenger rail; and USD 65 billion for broadband; USD 49 billion for public transportation; and USD 25 billion for airports. The draft agreement requires the federal government to exceed its expected expenditures of USD 575 billion, with a total expenditure of USD 973 billion in five years. If allowed to persist for eight years, the total expenditure for the plan will amount to USD 1.2 trillion.

How will the country obtain such a massive sum to implement its infrastructure plan? President Biden said that he has discussed with country's lawmakers to fund the plan through public-private partnerships, existing federal funds, and revenues from strengthening the enforcement of the Internal Revenue Service (IRS). Specifically, he stated that these investments will be funded through more than a dozen financing mechanisms, including approximately USD 100 billion in tax revenue from the increased enforcement of the IRS, unused COVID-19 aid funds, and unemployment insurance funds returned by different states.

For the U.S. government and Congress to reach a mutual agreement on the proposed infrastructure plan, it would translate to a significant milestone for Biden's administration in the department of U.S. domestic affairs since it took office, as it would significantly impact the administration's governance, U.S. capital market, U.S. domestic investment and even the country's politics.

First of all, the U.S. government has already reached an agreement with Congress on the infrastructure plan, which means the Biden administration has already won half of the battle. Biden got the infrastructure plan he wanted. This proves he is capable of negotiating and coming out victorious in the U.S.' currently polarized political environment. More importantly, the Republican Party made concessions as Biden maintained a stronghold. This will further divide the different factions present in the Republican Party.

Secondly, Biden has strengthened the Democratic Party's position in U.S. domestic policies through infrastructure projects. Biden and the Democratic Party's entire infrastructure plan of is divided into three parts: old infrastructure, new infrastructure, and lastly, what Biden calls "human infrastructure". The agreement reached includes new and old infrastructure. Although Biden obtained an amount lesser than what he had hoped, which was originally USD 4 trillion, it does speak a lot about the Republican Party's willingness to compromise. "Human infrastructure" is essentially a welfare policy at its core, something the Republicans hardly compromise on. The current approach of the two parties is to reach a mutual agreement in whichever areas they can, whilst Democratic Party will use its dominant position in the two houses to forcefully advance its agenda in other areas, as the Democratic Party will still dominate the United States in the next two years if the Republicans cannot reclaim their victory during the midterms.

Thirdly, as the United States is a step closer to realizing the infrastructure plan, this will form a supporting pillar to its economy. The infrastructure program is expected to promote the largest infrastructure investment in the country. It will repair roads and bridges, and invest in railways and road traffic. Moreover, there will be key investments in clean energy, while lead water pipes in schools and house will be replaced. Finally, the U.S. will also invest in high-speed Internet. According to Biden, the plan will create millions of high-paying works that cannot be outsourced. Should the large-scale infrastructure program be implemented, it will form a certain degree of impactful support to the U.S. economy.

Fourthly, large-scale infrastructure projects will stimulate the rise of U.S. stock market and energy prices. Since President Biden's infrastructure plan has received cross-party support, this has greatly boosted investor optimism. The three major U.S. stock indexes closed up across the board on June 24. Both the S&P 500 and Nasdaq hit new closing highs, while the Dow also rose 0.95% on the same day. The positive news also drove the Dow's blue-chip infrastructure equipment maker Caterpillar and financial institution Goldman Sachs to rise more than 2%; technology giants also generally rose. In terms of international oil prices, investors are likewise optimistic about the U.S. economy recovery and the prospects of the recovery of in global oil demand. International oil prices rose slightly on June 24. The price of light crude oil futures for August delivery on the New York Mercantile Exchange (NYMEX) closed at USD 73.30 per barrel. The price of London Brent crude oil for delivery in August closed at USD 75.56 per barrel. The implementation of the infrastructure plan will also stimulate the capital market and commodity market to rise in the future.

Final analysis conclusion:

Overall, the U.S. government's infrastructure plan has won cross-party support, and it is only a matter of time before USD 1.2 trillion infrastructure project will gradually unfold. This is a major domestic political achievement for President Biden and it helps to strengthen the Democratic Party's position. At the same time, the infrastructure plan will form substantial support for the U.S. economy, capital market, as well as oil prices. It will also strengthen market expectations for the recovery of the U.S. and global economy.

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