Build Back Better Breakdown

Senator Joe Manchin (D-WV) announced yesterday that he was withdrawing his support for President Joe Biden’s Build Back Better legislation. His declaration comes a week after Manchin delivered a proposal to the White House that he could support, but which was rejected because it lacked some provisions important to more progressive Democrats. His announcement took the Biden administration by surprise and prompted harsh criticism from progressive Democrats and from the president’s own press secretary.

What happened?

Senator Joe Manchin (D-WV) announced yesterday that he was withdrawing his support for President Joe Biden’s Build Back Better legislation. His declaration comes a week after Manchin delivered a proposal to the White House that he could support, but which was rejected because it lacked some provisions important to more progressive Democrats.

His announcement took the Biden administration by surprise and prompted harsh criticism from progressive Democrats and from the president’s own press secretary. Manchin’s opposition effectively kills the budget reconciliation bill in its current form, after months of negotiation. President Biden’s strategy of isolating Manchin within the Democratic caucus, and pressuring him to accept provisions with which he was clearly uncomfortable, was unsuccessful.

What’s next?

Senate Majority Leader Chuck Schumer (D-NY) announced this morning in a letter to colleagues that a vote will still be held in January on a revised Build Back Better reconciliation bill. Absent substantive changes to the current legislative framework, we do not expect Senator Manchin to change his mind. Democrats will be forced to scale back their expectations, focusing on fewer priorities and funding them on a permanent basis. This opens up the possibility that a smaller and more streamlined budget bill may still be presented for consideration during the first quarter of 2022.

In the meantime, retroactive relief from the limitations on state and local tax (SALT) deductions appears less likely as Democrats scramble to craft a new budget bill before the current continuing resolution expires on 18 February. SALT relief remains a critical component to any compromise within the Democratic caucus, but the probability that such relief is means-tested has increased. The final monthly payments under the expanded child tax credit were delivered last week, which places renewed pressure on Congress to revisit the program in January. Again, means-testing such payments may be necessary to reduce the budgetary impact and to reach a political compromise on an extension.

CIO believes that a smaller and less expensive reconciliation bill is still possible after this past weekend’s collapse in negotiations but remains an uphill climb and will encounter numerous obstacles. The holiday recess will allow the White House an opportunity to manage expectations and to focus on enacting fewer programs. A continuing resolution through the end of the fiscal year is another alternative, albeit an unwelcome one from the perspective of the current administration.

What is the economic and market impact?

The timing of Senator Manchin’s decision was unexpected and comes at a time when markets are worried about slowing growth due to the omicron variant and the prospect of Federal Reserve policy becoming less accommodative. The fiscal news has contributed to market weakness today, but was secondary to these other risks, in our view. The collapse in negotiations with regard to the Build Back Better plan does not significantly alter the growth outlook.

A failure to pass such legislation should reduce growth slightly relative to current expectations for next year, but the magnitude should only be a few tenths of a percent for an economy that’s likely to grow close to 4%. The risk of higher—or alternative minimum—corporate taxes is also eliminated if a plan does not pass, so the net effect on corporate earnings of slightly slower growth should be close to zero. That said, we acknowledge that uncertainty over fiscal policy does amplify to existing market volatility stemming from omicron and Fed policy and that’s likely to persist through year-end.

Co-authored by Tom McLoughlin, Head of Fixed Income Americas, and Jason Draho, Head of Asset Allocation Americas

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