Market Commentary | March 29, 2021

Stimulus Payback: 2023

Stimulus Payback: 2023

Key Points

  • Policymakers in major economies have pointed to 2023 as the date the stimulus payback may begin.

  • The U.K. has proposed tax hikes in 2023, the Eurozone has suggested that suspended budget rules may be reimposed, and some members of the U.S. Federal Open Market Committee believe they will begin to raise interest rates in 2023.

  • The economic headwind of rising interest rates may not slow growth until 2023.

The amount of fiscal and monetary stimulus has been record-breaking, and it has done a lot to propel the most rapid global economic rebound in history. But when do we start to pay for it, and what will the cost be to the economy as easy money starts to become tight? The good news: payback may not come until 2023, making current worries premature. The bad news: it may be hard to avoid after that.

2023 has been called out as the year of the payback by policymakers in the U.K., U.S. and Europe. While these decisions could be delayed until even later, they are unlikely to be brought forward.

Tax time in the UK

In early March, the United Kingdom’s Chancellor of the Exchequer, Rishi Sunak, proposed raising corporate taxes in 2023 to help fund some of the U.K.’s pandemic spending in Britain, after a similar proposal from U.S. Treasury Secretary Janet Yellen.

At 19%, the U.K. corporate tax rate is the lowest in the G7, and the U.S. tax rate sits at a competitive 21% (27% in the chart below which includes state taxes. While taxes hikes are far from assured, Yellen’s proposal to lift the U.S. rate by 7% gives the U.K. chancellor room to raise rates while maintaining the U.K.’s position at the bottom of the list, assuming rates in Canada, France, Germany, Italy, Spain and Japan remain at or above 25%.

Will corporate tax rates rebound?


The U.S. federal corporate income tax rate is a flat 21%. Most state and many local governments impose net income taxes. The top marginal rate generally ranges from 0% to 12%, with the mean of the top state tax rates being roughly 7.5%. A corporation generally may deduct its state and local income tax expense when computing its federal taxable income, resulting in a net effective rate of approximately 27%.
Source: Charles Schwab, KPMG data as of 3/26/2021.

Fed Up in the U.S.

In response to the pandemic, the Fed cut policy rates to zero once again, after having lifted rates nine times from the end of 2015 to the end of 2018 and raising the floor to 2.25%. Fed Chairman Powell implied that rates may stay at zero for some time, but some see the possibility for the return of rate hikes in 2023. 

According to the Fed’s dot plot from the March meeting, seven participants of the Federal Open Market Committee now expect a rate increase by the end of 2023, up from five in December. Atlanta Fed President Bostic said he sees the first rate hike in 2023 based on the expectation of full employment in 2022 and inflation above 2% in 2023. The markets concur; Eurodollar futures have moved to price in rates rising nearly 1% above current levels by the end of 2023.

Market expectation for change in U.S. short-term rates by Dec 2023 


Source: Charles Schwab, Bloomberg data as of 3/26/2021.

Back on a budget in Europe

In early March, the European Commission issued guidance on fiscal policy with the aim of preventing "a premature withdrawal of fiscal support, which should be maintained this year and next." The Commission included a proposal to extend waiving the Stability and Growth Pact's debt and deficit requirements until 2023. These waivers would allow countries to continue running higher deficits in the meantime. 

The waivers imply the Commission's intention to avoid a relapse into post-crisis austerity, such as what occurred in the aftermath of the Global Financial Crisis. While the reimposition of budget rules in 2023 isn’t assured, it is unlikely to take place before then. The Commission forecasts 17 out of 27 European Union countries breaching the 3.0% deficit criterion in 2022.

Lagged impact

Policymakers’ decisions may be deferred, depending on conditions in 2023, but markets have already moved to price in the impact of the stimulus. Consequently, the rise in interest rates may start to become an economic headwind in 2023. 

Looking back over the past 20 years, changes in the 10-year government bond yield in Europe and the U.S. have estimated the direction of GDP growth in the subsequent two years. The chart below shows that the path of interest rates, when flipped upside down and moved forward by eight quarters, is a leading indicator of Eurozone GDP growth—with the 2020 recession a notable exception caused by efforts to contain the outbreak rather than the result of market conditions. Interest rates don’t point to a downturn in GDP growth until around the start of 2023.

Rising European interest rates could become a headwind in 2023


Source: Charles Schwab, Bloomberg data as of 3/27/2021. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

A similar pattern can be seen below in the chart of U.S. economy and bond yields, pointing to the current rise in yields weighing on growth in 2023.

Rising U.S interest rates could become a headwind in 2023


Source: Charles Schwab, Bloomberg data as of 3/27/2021. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

A period of payback for the stimulus may be coming, but given that long lead time, the markets recent concerns about rising rates may be premature.


Michelle Gibley, CFA®, Director of International Research, and Heather O’Leary, Senior Global Investment Research Analyst, contributed to this report.