Understand what midterm elections could mean for the US economy

The midterm elections in the United States take place, this Tuesday (8), at a time of economic vulnerability for the North American country.

Recession forecasts have largely focused on “when” rather than “if”, and inflation remains stubbornly high. People are feeling the pain of rising interest rates and facing a winter filled with geopolitical tension.

The election results will determine the composition of a body of Congress with the potential to enact policies that will fundamentally change the fiscal landscape.

Below are the key policy issues investors will pay particular attention to as they digest the election results.

tax changes

Last week, President Joe Biden suggested he could impose an unexpected tax on big oil companies after they posted record profits on high gas prices.

Republicans would be less likely to approve this windfall tax on oil company profits, and they are also generally not in favor of tax increases on the rich.

“What do midterms mean for markets? If Republicans get the House, tax increases are dead in the water,” said David Wagner, portfolio manager at Aptus Capital Advisors.

What about tax cuts? If the Republicans take control of Congress, it would be difficult to pass any big tax cuts without some support from the Democrats or President Biden, which means there can be arrogance without much action.

debt limit

The federal debt ceiling was last lifted in December 2021 and will likely be hit by the Treasury sometime next year.

That means it will need to be raised again to ensure the United States can borrow the money it needs to run its government and ensure the smooth functioning of the US Treasuries market, totaling about $24 trillion.

A fight appears to be brewing between Democrats and Republicans. House Republicans indicate they can ask for big spending cuts in exchange for raising the ceiling.

If the government ends up divided and indiscipline continues, there could be bad news for the markets. The last time this stalemate occurred, under the Obama administration in 2011, the United States lost its perfect AAA credit rating from Standard & Poor’s and stocks dropped more than 5%.

Spending

Democrats have indicated they intend to focus on parts of President Biden’s proposed fiscal 2021 agenda that have not yet become law, including expanding health coverage and child care tax credits.

A Republican victory or a stalemate could derail that.

Goldman Sachs economists also note that a Democratic victory would likely boost the federal fiscal response in the event of a recession, while Republicans would be more likely to avoid costly bailouts.

social Security

Popular programs like Social Security and Medicare face long-term solvency problems, and the issue has become controversial for both sides of the aisle.

The topic is so observed that even debating changes can impact consumer confidence, analysts say.

Democratic Senator Joe Manchin said last week that spending changes must be made to bolster Social Security and other programs he says are “failing.”

He told a conference of Fortune CEOs that he favored bipartisan legislation over the next two years to tackle rights programs that are facing “tremendous problems.”

Republican Senator Rick Scott has proposed submitting nearly all federal spending programs to a renewal vote every five years. Analysts say this could make Social Security and Medicare more vulnerable to cuts.

Federal Reserve

Lawmakers have increasingly spoken out against the pace of the Federal Reserve’s interest rate hikes aimed at fighting inflation. Democratic senators Elizabeth Warren, along with banking chairman Sherrod Brown, John Hickenlooper and others urged Fed Chair Jerome Powell to slow the pace of the hikes.

Now, Republicans are getting involved.

Senator Pat Toomey, the top Republican on the Banking Committee, urged Powell last week to resist buying government debt if market conditions remain subdued. Expect more scrutiny from both parties after the elections.