Tuesday’s midterm elections come at a pivotal time for the US economy as it faces an increasingly bleak outlook amid stubbornly high inflation and the heightened likelihood of a recession this year or next.
Voters feeling the consumer price chain still hovering around a 40-year high will vote to determine which party controls the House and Senate, and the winners will almost immediately face a struggling economy beleaguered by inflation. galloping. and rapidly rising interest rates.
But the next Congress, which won’t meet until January, will also have the power to shape the economy with fiscal policy.
Here’s a look at some of the issues experts are paying close attention to as they await the results of Tuesday’s election.
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Both parties promise to pass major tax changes if they win control of both houses of Congress.
Republican lawmakers are preparing to extend key elements of the old of President Trump tax reform, and President Biden remains committed to pushing through his tax hike plan to increase levies on businesses and wealthy Americans and implement a global minimum tax. If the GOP takes control of the House and Senate, Biden’s plan will be cut short.
“The prospects for significant tax legislation beyond this year depend almost entirely on the outcome of the election,” said John Gimigliano, head of legislative affairs at KPMG.
Should the GOP regain control of both houses of Congress, he said a top economic priority would be to enshrine in law key elements of the Tax Cuts and Jobs Act of 2017. This $1.2 trillion tax overhaul — the biggest since Ronald Reagan took over the Oval Office — slashed the top personal tax rate to 37% through 2025 and permanently cut the corporate tax rate from 35% to 21%.
House Minority Leader Kevin McCarthy confirmed in an interview with FOX Business’ Larry Kudlow last month that Republicans want to “lock in these tax cuts that we got, that we need to pass over the course of of the next two years to make that happen as well.”
Yet unless Republicans win a majority of more than 60 Senate seats — an unlikely event — they would have to recruit several Democrats to avoid a filibuster and pass the measure in order to force President Biden’s hand.
Congress will need to raise or suspend the federal borrowing limit sometime in 2023 to avoid a first-ever default on the national debt.
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The US Treasury is expected to reach its mandatory borrowing limit of $31.4 trillion within the next year; if Republicans win control of either house of Congress, they could use the debt ceiling as an opportunity to curb spending initiatives by Biden and the Democrats.
Still, Republicans and Democrats may work together on a bipartisan bill to avoid a shutdown and raise the debt ceiling.
“We know neither party wants a government shutdown in December, so there will have to be a rolling bill with funding inside,” said Gimigliano, a former House GOP aide.
The Federal Reserve
The Federal Reserve has largely acted with impunity this year as it raises interest rates at the fastest rate in decades, but could draw more attention from lawmakers next year as it struggles to contain galloping inflation.
Democrats led by Sen. Elizabeth Warren, D-Mass., have previously raised concerns about rising interest rates, warning of impending job losses due to tighter monetary policy.
“We are writing to express our concern and request additional information about the implications of the Federal Reserve’s (Fed) most recent economic projections, its intention to continue raising interest rates at an alarming rate, and your ominous warning to American families that they should expect ‘pain’ over the next few months,” the Democratic lawmakers wrote in a letter to President Jerome Powell last week.
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Republicans are also stepping up their criticism of the U.S. central bank: Sen. Pat Toomey, R-Pa., last week called on Powell to refrain from buying government bonds if market conditions remain moderate.
With the economy teetering on the edge of recession even as inflation nears a 40-year high, expect lawmakers on both sides of the political aisle to step up their scrutiny of the Fed.
The Fed has already raised interest rates six times in a row this year, putting the benchmark federal funds rate well into restrictive territory. Policymakers keen to get inflation under control showed no signs of slowing down.
But the rapid tightening of monetary policy has raised the specter of when – not if – the United States will fall into recession. Most economists are bracing for a slowdown in late 2022 or early 2023.
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If Democrats maintain control of the House and Senate, expect the recession response at the federal level to include more spending initiatives such as stimulus checks or other types of financial aid, according to Goldman Sachs economists. On the other hand, if Republicans took control, they would be more likely to avoid costly relief programs.
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