A big tailwind for the US economy last year came from non-residential construction investment. There is every reason to believe the IRA will set a floor for US growth again in 2024. The IRA sought to shift the predominant way of financing renewables away from tax equity partnerships to ‘transferability’. The market for tax credit transfers is scaling much faster than anticipated. This could provide a significant fillip to renewable energy investment this year.
The ‘Tax Relief for American Families and Workers Act of 2024’ has advanced, with R&D expensing and bonus depreciation extended through to 2025. Net tax cuts will be in the order of $118bn in FY24 and $38bn in FY25. This is not insignificant, given the US budget deficit had already widened to $553bn in Q4. Many of the provisions in the 2017 Tax Cuts and Jobs Act (TCJA) are scheduled to expire at the end of 2025. Republicans generally want to extend all expiring tax cuts from the 2017 law. The way Donald Trump has been able to swat aside other Republican candidates, may pile pressure on President Biden to outline a more profligate fiscal path of his own during the 2024 Presidential contest.
S&P 500 at 5,000 is still a target, and the 10-year Treasury yield should drift towards 5% by year end. Fiscal policy remains in the driving seat.
In the UK, the Chancellor is set to be given around £6bn-£10bn of extra headroom by the OBR. The plan is clear: Jeremy Hunt cited Lawson over the weekend, promising more tax cuts, over potentially two budgets, before the next general election. It seems that for many in the Conservative Party, and despite the mini-budget crisis in the Autumn of 2022, Liz Truss won the debate. But the Chancellor may be getting ahead of himself. The private sector will have to absorb a record £206bn of borrowing this year and £237bn next year. Sir Robert Stheeman – the outgoing head of the DMO – warned in a recent interview, that issuing bonds was getting harder and investors might increasingly act as a restraining influence on fiscal policy. The 30-year Gilt yield was back up to 4.55% as of last Friday, following the hotter-than-expected core inflation print.
