To deal with the consequences of record inflation in the US, the American president Joe Biden has recently signed theInflation Reduction Act (IRA), approved by Congress with only Democratic votes. The White House has thus achieved an important political success after months of stalemate, yet the new law is not what it seems: "Despite the name - write the analysts of Intesa Sanpaolo in a focus on the United States – the provision it has no effect on the path of inflation, but has a significant environmental impact”. To achieve this result, the reform is grafted onto the significant downsizing of the Build Back Better Act, eliminating its push towards a highly redistributive policy, characterized by widespread social programs and significant tax increases.
What's in the Inflation Reduction Act
In terms of content, the new law focuses on energy, climate, health care and tax policy. Here are the main measures:
- interventions related to the environment for 386 billion dollars (incentives and tax credits for households and businesses aimed at favoring the transition to renewable energy sources or nuclear power);
- subsidy extension for three years introduced with the Affordable Care Act (the health care reform implemented by the Obama administration) for the purchase of health insurance and expiring at the end of 2022 (the expected cost is 64 billion dollars);
- introduction of a minimum 15% corporate income tax (which should guarantee revenues of approximately 222 billion over 10 years) and a 1% excise duty on share buybacks by companies;
- financing of 80 billion per strengthen the agency that collects taxes (the measure should generate an increase in revenues of 204 billion dollars over 10 years and a 124 billion smaller deficit);
- savings of approximately 320 billion in 10 years on outlays for the reimbursement of pharmaceutical expenses.
The reduction of the deficit
From an accounting point of view, the Intesa Sanpaolo Studies and Research Department points out, in 10 years the Inflation Reduction Act provides for higher expenses and lower revenues/tax incentives of around 500 billion dollars, compared to 790 billion in savings and higher revenues , producing overall a restrictive effect on the deficit of just under 300 billion in the period 2022-31. The impact is initially modest (about 20 billion in 2023), but grows during the decade considered (about 85 billion in 2031), partly due to the end of health subsidies in 2025 and partly due to the growing effect of drug price limits.
The environmental benefits
From an environmental point of view, however, the Biden administration estimates that the Inflation Reduction Act will allow the US to have in 2030 a level of polluting gas emissions about 40% lower than the 2005 peak. According to a study by Princeton University, the reduction will be even higher, equal to 42%, against -26% with unchanged policies. In this way, about two thirds of the distance from the government's official target of a 50% reduction would be covered.
Flop on inflation, marginal effects on growth
However, the anti-inflation effects which give the law its name “are minimal and deferred”, even “almost nil” and “would derive from the limits on the prices of medicines and from interventions that favor greater energy efficiency and a shift towards renewable sources”, concludes Intesa Sanpaolo, underlining that “also the direct impact on growth will probably be marginal and concentrated on the second half of the decade”.
