As the 2024 U.S. election cycle kicks into gear, Citigroup ponders the potential fiscal implications under different election outcomes.
Perhaps most interesting is their prediction of a high likelihood of Republicans gaining control of the Senate, although falling short of a 60-vote filibuster-proof majority. This, however, does not guarantee smooth sailing for the GOP. With the Democrats' current grip on the Senate (51-49), Republicans would need to not only retain competitive seats but also snatch at least one from key states like Florida or Texas.
According to Citi, the Senate will flip republican: "Democrats currently control the Senate 51-49. But Senator Manchin’s decision not to compete for his seat in West Virginia means that state is very likely to go to Republicans." pic.twitter.com/pgc19h4lGX— zerohedge (@zerohedge) December 5, 2023
House Dynamics: Democrats' Favorable Map
According to the report, Democrats are in a favorable position when it comes to regaining control of the House - needing to net just five seats. This contrasts with the 16 Republican districts classified as "toss-ups," implying yet another shakeup which would cast all sorts of GOP investigations into disarray.
Presidential Race: Trump's Lead and Third-Party Wildcards
Donald Trump's enormous lead over the GOP field means he's almost guaranteed the Republican nomination, absent. That said, the presence of a third-party candidate like Robert F. Kennedy Jr. could throw a wrench in the works (theories on just who RFK Jr.'s run will most negatively affect vary). Although his current impact seems neutral, pulling votes from both Trump and Biden, his influence cannot be ignored.
Trump is currently smoking the entire GOP lineup, and has recently overtaken President Biden in hypothetical match-ups.
Fiscal Policy: A Divided Government's Dilemma
According to Citi, under two of the three most likely election outcomes, the U.S. would see a split legislature. This division would mean further gridlock, with bipartisan cooperation required to pass any fiscal legislation - a feat that has proven challenging in recent times. Potential areas of agreement could include defense and infrastructure spending, as well as industrial policy through legislated subsidies, similar to those in the bipartisan CHIPS Act.
"Red Wave" Scenario: Tax Cuts and Deficit Concerns
Should a "red wave" occur, giving Republicans control of both the presidency and the legislature, Citi believes that the reconciliation process to brute-force policy could be a game-changer. It would allow the GOP to pass legislation on taxes, spending, and the debt limit with just a simple Senate majority.
Another likely outcome of a red wave would be the likely renewal of Trump-era individual tax cuts, which could significantly increase the deficit.
According to the Congressional Budget Office, if Trump's 2017 Tax Act provisions are extended, it would increase the deficit by $134 billion in 2026 and $346 billion in 2027.
Even in a divided government, some of the Trump tax cuts could be extended, which Congress did in 2011 in a bipartisan vote to extend Bush-era tax policies.
Fiscal Restraint Amid Growing Deficits
Citi's analysis also emphasizes an increased focus on fiscal restraint due to growing deficits, which could be larger than anticipated in 2023. According to the report, "The 2024 deficit is boosted in part because of automatic stabilizers that would kick in during a recession."
With deficits projected to remain elevated in 2024 and 2025, there will likely be a reduced appetite for additional fiscal stimulus, especially in an election year with ongoing concerns about inflation
The key takeaway? Brace for uncertainty and keep a close eye on the evolving political landscape.