THE STATE OF THE EUROPEAN UNION REPORT. Europe in a period of transition

THE FISCAL EFFORT TO COMBAT COVID-19: EUROPE AND THE UNITED STATES 65 The new infrastructure package proposed by Presi- dent Biden, pending approval by the US senate, repre- sents a change of direction in spending and, with it, the United States is shifting from an emergency policy to a recovery based on a progressive approach. The Biden administration’s programme, in addition to major in- vestment in infrastructure, also encompasses the fight against climate change, strengthens the Obamacare health programme, and provides support for industry and employment. On 31 March 2021, President Biden proposed an ambitious infrastructure plan worth 2.6 trillion dollars, with the aim of stimulating economic recovery and em- ployment by upgrading roads and bridges, developing high-speed rail and electric transport, rolling out 5G, and investing in the electricity network. On 1 July 2021, Congress approved a draft bill (INVEST in America Act) for 715 billion dollars, focusing on transport and wa- ter infrastructure, which should be followed by a more wide-reaching act still under negotiation in the Senate. It remains to be decided whether the INVEST in America Act will finally be integrated within the budget frame- work of the Infrastructure Plan. However, it is already clear that this will reduce its initial ambition from 2.6 to 1.2 trillion dollars, of which 579 billion will be new spending, potentially representing around 3 per cent of GDP in additional fiscal stimulus, contributing to an in- crease in the total US fiscal effort to reach 29 per cent of GDP for 2020. Inflation It is still early to evaluate the impact of the various stimulus plans on the real economy. However, in recent months there has been considerable debate about its effects on inflation. The annual consumer price index grew by 5.4 per cent in June 2021 in the United States (BLS, 2021), the biggest annual rise since 2008. In Europe, the increase in inflation has been more moderate. In May 2021, the consumer price index rose by 2 per cent compared to the previous year, while in June growth was 1.9 per cent (Eurostat, 2021). It seem more likely that rising prices are due to short- term supply problems, linked to a rapid reopening of the economy, than to general reheating linked to fiscal stim- uli, although these may also have an inflationary effect. It is also important to take into account the effect of the annual comparison on 2020, an atypical year in which the economy was hit hard by partial closures.The current situation, in which consumers want to spend the savings accumulated during the pandemic and suppliers need to resolve bottlenecks caused by the reactivation of the economy, generate a temporary inflationary effect. It is possible that these imbalances will continue to be felt over the next nine months in specific sectors, but it is likely that, after the summer, the bottlenecks in the pro- duction of goods and services will gradually be resolved, in turn moderating the rise in prices. At the same time, the new wave of the Delta variant and its impact on recovery has recently reduced concern Table 5: United States fiscal measures in response to the covid-19 pandemic, January 2020-April 2021 (% of GDP) Measures with immediate budgetary impact (“Above the line”) Liquidity support Additional spending or income not received Accelerated spending / deferred revenue Subtotal “Below the line” measures: equity injections, loans, asset purchase or debt assumptions Contingent liabilities: Guarantees Subtotal Health sector Others 25.5 3.3 22.2 0.1 2.4 0.3 2.2 Source: IMF, 2021.