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08 December 2020

Promises Made… Promises Kept?

James Rowbury, Investment Research Coordinator
 
A mixed bag of policies for business but, with a divided Senate, will Joe Biden be able to keep his word?
 
Following a bitterly divisive presidential election, Joe Biden will become America’s 46th President after defeating incumbent Donald Trump. His plans for the next four years are to confront the challenge of a divided government, while combatting the Coronavirus pandemic and the recession to follow. Biden has also proposed policies which will target the global climate crisis, education, immigration, housing, as well as taxes, infrastructure and trade. 
 
Biden’s pandemic response would aim to restore the economy in the shorter term by protecting workers from the pandemic, using the Defence Production Act to produce more personal protective equipment (PPE). The newly-elected President calls for free COVID-19 testing and vaccines and plans to introduce a Pandemic Testing Board which would coordinate testing distribution, while a proposed Public Health Jobs Corp would target contact tracing.
 
Also on the cards are plans to create five million new jobs through Biden’s ‘Buy American’ plan, where the government will spend US$400bn to buy American products. A further US$300bn would be directed to research and development, including half going towards clean energy. The federal minimum wage could also be more than doubled to US$15 an hour in the attempt to stimulate further economic growth. The President elect has pledged to expand Obamacare subsidies to reach more middle-income families; under his scheme no one on a public plan would pay more than 8.5% of their income towards health insurance.
 
With a green agenda top of the longer-term list, Biden announced a US$2tn plan to combat climate change and to invest in clean energy. One major reversal which Biden wishes to enact is Trump’s controversial executive order to leave the Paris Climate Agreement, which includes around 200 countries pledging to reduce carbon emissions. This one has potential to divide the Republican-held senate; while many do not hold Trump’s values on energy generation, the sheer cost of the project is likely to ruffle feathers in the fallout of the hefty pandemic response stimulus. The private sector may have to foot the bill somewhat and, with the viability of projects improving markedly, ESG-centric investment, particularly in clean energy, should be the first beneficiaries. This green strategy has been aptly named the “Clean Energy Revolution”, which following the sizeable investment aims to create 10 million jobs. The key goals include achieving net-zero emissions by 2050, ending subsidies for fossil fuels and eliminating carbon emission in the power sector by 2035.
 
Federal revenue could be increased by US$3.3tn over ten years by increasing the corporate tax rate to 28% and imposing a 12.4% Social Security payroll tax for those earning more than US$400,000 a year.
 
These all perhaps sound like very idealistic Democratic policies, however, issues arise due to the structure of the United States Federal Government. Particularly, these are related to clashing political parties within the government and the effects this will have on Biden’s ability to pass legislative changes. A gridlocked government refers to the President’s party differing from the majority party within the Senate, which is likely to make it increasingly difficult for Biden to push through his policy ideals.
 
At the time of writing, the race for Senate is still unclear ahead of a January run-off in Georgia, but the Republican party is in control of 50 seats compared to the 46 seats held by the Democrats. If the Republicans maintain this majority, it is likely that Biden will not succeed in passing significant legislation, such as large-scale tax increases, green policies, and healthcare amendments.
 
There are however additional market advantages to a gridlock within the US government; restricting new legislation being written reduces uncertainty for many industries. For example, Biden has threatened antitrust laws upon technology firms, so with a divided government, such policies may be limited. In addition, Biden aims to raise corporation tax from 21% to 28% and has proposed a minimum federal tax aimed at companies such as Amazon - all of which would create a headache for the tech giants which dominate the weightings of the S&P 500 - so we can only see the gridlock as a positive for this industry also.
 
This article was taken from the November 2020 issue of the publication, Market Insight. To sign up for our investment publications please visit www.redmayne.co.uk/publications.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Promises Made… Promises Kept?
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