Due to various offsets, a $2 trillion federal investment would increase infrastructure spending across all levels of government increases between $440 billion and $2,033 billion---including the original $2 trillion---based on evidence of past experience.
If a gas tax were used to fully fund the $2 trillion investment, the gas tax would have to rise by $1.67 per gallon for 10 years, thereby increasing the current federal gas tax from $0.184 (18.4 cents) per gallon to $1.854 per gallon.
If fully deficit-financed, the $2 trillion infrastructure proposal lowers GDP between 0.1 and 0.5 by 2043, relative to current policy. If fully financed with user fees or higher gas taxes it typically boosts GDP, between -0.1 and 0.4 percent by 2043.
Senate Democrats propose spending $1,022 billion on public infrastructure over the next 10 years, financed with taxes on personal income and corporate income.
An additional dollar of federal aid could lead state and local governments to increase total infrastructure spending by less than that dollar since state and local governments can often qualify for the new grant money within their existing and planned infrastructure programs. Based on an extensive literature review, we estimate that infrastructure investment across all levels of government increases between $225 billion and $1,039 billion, including the $1,022 billion federal investment.
Depending on how much state and local governments spend on infrastructure in response to federal aid, we estimate that the plan changes GDP between -0.1 and 0.1 percent by 2032 relative to no policy change. By 2042, the plan changes GDP between -0.3 and -0.2 percent.
However, based on previous experience reviewed herein, most of the grant programs contained in the infrastructure plan fail to provide strong incentives for states to invest additional money in public infrastructure. Indeed, an additional dollar of federal aid could lead state and local governments to increase infrastructure total spending by less than that dollar since state and local governments can often qualify for the new grant money within their existing infrastructure programs. We estimate that infrastructure investment across all levels of government would increase between $20 billion to $230 billion, including the $200 billion federal investment.
We estimate that the plan will have little to no impact on GDP.
President Trump proposes to increase infrastructure investment by $1.5 trillion over 10 years by attaching incentives to $200 billion of new federal spending. However, this plan lacks details about implementation. We, therefore, consider three possible options.
By 2027, we estimate that GDP is between 0.0 and 0.5 percent larger than under current law, depending on which one of the three policy options is used. By 2037, GDP is between 0.0 and 0.4 percent higher.
By 2027, debt held by the public is between 0.4 and 0.9 percent larger than under current law. By 2037, debt is between 0.4 percent lower and 0.6 percent larger.
The White House Fiscal Year 2018 Budget proposes spending $200 billion in new federal spending over 10 years to stimulate a total new infrastructure investment of $1 trillion.
However, separately, other changes to infrastructure programs in the budget propose to reduce federal spending between $185 billion to $255 billion over the next 10 years, depending on whether certain changes are temporary or permanent.
On net, therefore, the White House 2018 Budget proposes changing federal infrastructure spending between -$55 billion to $15 billion over 10 years.
This June, PWBM’s First Spring Policy Forum discussed what real world evidence has to say about public infrastructure policy. PWBM’s Jon Huntley looked at how infrastructure plans can be designed to maximize growth while Ernst & Young’s Mike Parker shared a broad picture of the impact of federal spending on infrastructure.
Last Thursday, Transportation Secretary Elaine Chao was asked in Senate testimony to respond to PWBM’s recent analysis of President Trump’s FY 2019 infrastructure plan. On Friday, the White House issued a formal response that is critical of PWBM’s analysis.
To quickly recap, the President’s infrastructure plan proposes that the federal government spend $200 billion in incentives to produce $1.5 trillion in total additional infrastructure spending across state and local governments, including private sector partnerships. PWBM analysis of the President’s plan estimates that total infrastructure spending, across all layers of government, would increase between $20 billion to $230 billion, including the $200 billion federal investment. We also estimate that this spending would have little impact on GDP.
In a recent podcast and article “The White House Budget: What’s the Reality” by Knowledge@Wharton, the latest budget proposal by the White House was discussed by Kent Smetters (Wharton), Alan Auerbach (UC Berkeley), and David Kamin (NYU).
The news blasts about America’s crumbling infrastructure are hard to miss. Data available at USAFacts shows that in 2015, 14 percent of America’s bridges were functionally obsolete and another 10 percent were structurally deficient. Meanwhile, in 2014, commuters spent an extra 42 hours stuck in traffic.
The White House proposes to spend $200 in new federal money that it hopes will subsidize an addition $1.3 trillion in new infrastructure spending by state and local government and private enterprises.