Congress on Dec. 21 passed a $2.3 trillion yearend spending bill, including $1.4 trillion to fund the federal government through September 2021 and a $900 billion rescue package to provide direct fiscal aid to households and businesses equal to 4.25% of GDP. This represents the second-largest economic aid measure in the nation’s history. We expect the aid package will bolster U.S. growth conditions in the first half of 2021, likely preventing another economic downturn, which our forecast had previously implied.
We are revising our forecast for first-quarter growth in 2021 to 0.6% from a decline of 0.3% and an increase in second-quarter growth to 4.4% from 4.1%. While we anticipate that the new aid will temporarily boost both household consumption and savings, it is not sufficient to bolster long-term growth prospects for the economy. The legislation was passed too late, is too limited and expires too soon to offset the adverse economic impact caused by the intensification of the pandemic and the resulting pullback by the public and lockdowns around the economy in the fourth quarter of 2020. As a result, the aid package is not a stimulus bill, it is a rescue bill, and the economy will likely require another round of aid as early as the first quarter of 2021. The bill directs $286 billion to workers and households ($120 billion in unemployment insurance and $166 billion in economic impact payments), sends one-time $600 payments to adults and children in January and provides an extra $300 in benefits per week to the unemployed. However, we expect that given the quick termination of the aid (11 weeks), individuals who receive these benefits will save roughly half of what they receive. That is, we expect that the pool of savings that is already 6% to 7% of GDP, or roughly $1.25 trillion larger than pre-pandemic levels, will increase. While these savings will boost growth once the pandemic abates through the release of pent-up demand, they will not provide an outsize boost to economic activity this quarter or next.
Benefits cliff
While the aid provides sorely needed support for beleaguered households, it creates another artificial benefits cliff around the termination of unemployment benefits in the bill on March 14, 2021, well before most Americans will have access to vaccines. This creates risk for somewhere between 14 million to 20 million Americans who are dependent on various forms of unemployment insurance, most of whom will not be going back to work when this legislation expires. It also reduces the bang for the buck that would have been obtained from the aid if the timeline to receive benefits was extended well into 2021. Thus, this legislation is likely a next step in what will be another round of fiscal aid that will need to be passed during the first quarter of 2021.
Moreover, the decision not to include direct aid to municipalities and states that have experienced a decline in revenues linked to the loss of economic activity caused by the pandemic creates conditions for a rise in public-sector unemployment, including teachers, police officers and other first responders, as local and state governments move to balance budgets next year. Unlike the federal government, 48 of 50 states have balanced budget requirements. Consequently, the aid package represents the same economic policy decision made during the Great Recession, which resulted in higher unemployment and much slower growth during the subsequent recovery and expansion than would have otherwise been necessary.
MIDDLE MARKET INSIGHT One undeniable positive for middle market firms is that the legislation corrects the reported unintended tax consequence of the CARES Act.
Middle market and business tax windfall
One undeniable positive for middle market firms is that the legislation corrects the reported unintended tax consequence of the CARES Act. Prior to the Consolidated Appropriations Act, 2021, the total tax outlay related to the Paycheck Protection Program may have been in excess of $125 billion.
With an average loan size of $101,000, the estimated tax bill due—using a 25.3% estimated blended federal income tax rate to take into account corporate and pass-through borrowers—would be just over $25,000. Based on a 24-week forgiveness period, this could be equivalent to the wages of one full-time employee retained as a result of the program. Larger PPP loans magnify the tax impact significantly.
Quick summary: Shape of the relief package
Direct aid to individuals and families: The package provides an additional $300 per week to unemployed workers for 11 weeks. The legislation also includes $600 in direct payments to individuals who earn up to $75,000 per year or $1,200 for married couples filing jointly making up to $150,000 per year, as well as a $600 payment for each dependent child, all of which implies a family of four can receive up to $2,400 in direct one-time payments.
The legislation increases the maximum number of weeks an individual can claim benefits through regular state unemployment or through the Pandemic Unemployment Assistance program to 50 weeks, and it increases Pandemic Emergency Unemployment Compensation to 24 weeks. Both programs are extended until March 14, 2021, and allow individuals receiving benefits as of March 14 to continue through April 5, 2021. The bill provides an extra benefit of $100 per week for certain workers who have both wage and self-employment income but whose base unemployment insurance benefit calculation does not take their self-employment into account.
Small businesses: The legislation provides $325 billion in aid to small firms, including $284 billion for initial and second draw forgivable PPP loans, as well as dedicated set-asides for very small firms and lending through community-based lenders. Also included is $20 billion for new Economic Injury Disaster Loan (EIDL) grants for businesses in low-income communities, $3.5 billion for continued Small Business Administration (SBA) debt relief payments, $2 billion for enhanced SBA lending, and $15 billion in dedicated funding for entertainment and cultural institutions.
Community Development Financial Institutions and Minority Depository Institutions: The bill offers $15 billion in funding for CDFIs and the creation of a new Neighborhood Capital Investment Program to support CDFIs and MDIs.
Transportation: The bill includes $45 billion in funding for transportation, of which there is $15 billion for airline payroll support; $1 billion for airline contractors; $14 billion for transit; $10 billion for state highways; $2 billion for airports and airport concessionaries; $2 billion for private motor coach, school bus and ferry industries; and $1 billion for Amtrak.
Public health and vaccines: There is $69 billion in funding directed at public health and vaccine procurement and distribution. Twenty billion dollars will go toward procurement and distribution of vaccines, $9 billion to the Centers for Disease Control and Prevention (CDC) and states for vaccine distribution, and $3 billion to create a national stockpile. More than $22 billion will be sent directly to states for testing, tracing and COVID-19 mitigation programs.
Education: The bill offers $82 billion in direct funding for states, K-12 schools and institutions of higher education that have been significantly affected by the pandemic.
Rental assistance: The legislation has targeted $25 billion for rental assistance for families affected by the pandemic that are struggling to make rent and may have past-due rent compounding. These families will be able to use this assistance for past-due rent, future rent payments, and utilities and energy bills. This first-of-its-kind federal assistance includes an extension of the existing CDC eviction moratorium through Jan. 31, 2021.
Nutrition and agriculture: The legislation targets $26 billion toward nutrition and agriculture: $13 billion goes to families using the Supplemental Nutrition Assistance Program (SNAP) and $13 billion is for direct payments, purchases and loans to farmers and ranchers who have suffered losses due to the pandemic. Child care: There is $10 billion in aid directed toward child care that includes $250 million for Head Start providers.
Broadband: There is $7 billion in dedicated funding for the extension of broadband service, including $3.2 billion in emergency funding for low-income families.
