The FTSE 100 is unlikely to get a US infrastructure boost

The US midterms raises the prospect of bi-partisan co-operation over America’s crumbling infrastructure. However, funding issues make a deal tricky.

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  1. Garry White

A whole range of UK companies were expected to benefit from a $1 trillion-plus wave of infrastructure spending promised by Donald Trump ahead of his election in 2016. Ashtead, Ferguson, National Grid, CRH, Hill & Smith and others were all expected to win significant business as America repaired its sub-standard roads, bridges and pipelines. But not a single cent has been allocated so far. However, the split Congress following the midterm elections has raised the prospect of a bi-partisan deal – an agreement that could help lift the prospects of UK infrastructure companies that saw their share prices plunge in a torrid October. But is any accord really that likely?

There is no doubt that US infrastructure is in a very sorry state. Every four years, the US Army Corps of Engineers releases a “report card” that assesses the condition of America’s infrastructure, with the 2017 briefing giving an overall grade of “D+”. The best grade in individual sectors was a “B” given to the country’s railways, with a “D-” given to transit, which includes local buses. The country needs to spend $4.59 trillion to bring the grade up to an adequate “B”, the report stated. There are also solid economic arguments for investing in national infrastructure that could easily be tied into the theme of Making America Great Again. Such a programme will create jobs now – as well as provide productivity-enhancing infrastructure that is fit for the 21st century. 

Last week Senate Majority Leader Mitch McConnell and Nancy Pelosi, the probable House Majority Leader in the next Congress, talked about cooperation on this front. Also, White House economic advisor Larry Kudlow said on Tuesday that the Trump administration was examining a multi-faceted infrastructure plan that would improve the US shipping industry and energy pipelines. Mr Kudlow said that he was keen to invest in liquified natural gas (LNG) terminals so the country could export energy to places such as Europe.

So, what has each party proposed so far? In February, the White House unveiled a plan that ultimately went nowhere. It proposed spending $1.5 trillion all-in, but only $200bn of this would come from federal funding – and the money would come over a ten-year period. The proposals capped central government funding at 20pc for any single project, with cities and states responsible for raising the balance. In March, the Democrats responded with a plan of their own, which had a $1 trillion federal spending programme at its heart. “This $1 trillion investment would be paid for by revisiting the recently passed tax legislation,” the Democrats said. Here lies the problem. Raising that amount of cash is likely to need a combination of tax hikes, borrowing or budget cuts elsewhere. However, federal finances are already stretched after Trump’s tax cuts. Earlier this week, the US Treasury Department revealed that the federal government ran a $100bn deficit in October, boosted by an 18% year-on-year increase in federal spending to $353bn. Donald Trump’s tenure has, so far, been defined by deficit-financed largesse and major tax cuts – but the White House has already been hinting that there will be a more aggressive stance on the budget this year.

All of this means it is far from certain that any agreement can be reached. Raising taxes to fund any spending programme is likely to be political anathema for many Republicans. They remember that George HW Bush’s tax rises after he promised that there would be no such thing ultimately led to him becoming a one-term president. “Read my lips; no new taxes,” was the famous soundbite that became a major factor in putting Bill Clinton into the Oval Office. This history means it is could be very difficult to steer any tax rises through the Senate, where the Republicans will still have a majority – even if President Trump is supportive.

There is a suggestion that the federal gasoline tax should be increased to support this spending. The tax is pretty low, at just 18.4 cents a gallon, and has not been increased in 25 years.  However, there appears to be some significant political problems here too.  Advisers to the White House have warned that Democrats could be trying to spring a “gas tax trap” on the president in an attempt to sabotage his 2020 re-election. Such a tax rise is also likely to disproportionally hit poorer Americans, who tend to drive older, less efficient vehicles.

This means that there is likely to be some major squabbling over how any programme is funded – and it’s far too early to consider whether this is likely to be a boon for UK construction, design and equipment companies. Perhaps the greatest hope for this spending could come from the states themselves.  Twenty new governors will take up their positions next year – and many of them campaigned on infrastructure issues. For example, Tim Walz, the Democrat governor-elect in Minnesota, said he will increase the state gas tax to fund infrastructure improvements, especially in transportation. Such improvements are a big issue in the state where a bridge collapse in Minneapolis more than ten years ago killed 13 people and injured 145. The Republican governor-elect in South Dakota, Kristi Noem, also has significant plans for infrastructure spending too, showing the infrastructure issue really is bi-partisan. However, any US infrastructure bump for specific UK-listed companies appears to be a long way off.

A version of this article appeared in Friday’s Daily Telegraph.

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