The 2024 US Elections – Part III: Fiscal policy implications

Summary

The 2024 U.S. election will determine who is in charge of Congress and the White House come January 2025, which will have critical implications for the federal fiscal policy outlook, and by extension, the U.S. economic outlook.

The debt ceiling will be reinstated on January 2, 2025. Our base case is the “X date” (the date when Treasury would be unable to meet all its obligations on time) falls in the summer of 2025. However, there is a risk it falls as early as February 2025.

The looming expiration of large parts of the Tax Cuts and Jobs Act (TCJA) at year-end 2025 will be the most important post-election fiscal policy topic, in our view. The TCJA was enacted in 2017 and reduced taxes for individuals and businesses alike. Though most of the changes for corporations were made permanent, many of the tax changes for individuals and smaller businesses are scheduled to expire.

The fiscal cost of extending the TCJA is sizable and comes at a time when budget deficits are already quite large. The Congressional Budget Office estimates that fully extending the TCJA's expiring provisions would cost $3.5 trillion over the next decade, amounting to deficits that are 1.0-1.5% of GDP larger per year. A one percentage point increase in the structural budget deficit is associated with an increase in longer-term yields on Treasury securities of roughly 15-30 bps, all else equal.

Allowing the TCJA to expire would improve the budget imbalance, but it would likely come with some short-run pain. We doubt that the expiration of the TCJA would be enough to push the economy into a recession single-handedly, but it could knock a few tenths of a percentage point off growth and inflation in 2026.

There is significant uncertainty about the impact of tax policy changes that may or may not take effect in 2026. That said, we want to give readers some rough guideposts on our initial thoughts.

• Republicans sweep: A Republican sweep seems most likely to result in extending the 2017 tax cuts. An expansion of the cuts is more uncertain but strikes us as plausible. Should it occur, more fiscal stimulus should be associated with somewhat faster economic growth, higher inflation, larger budget deficits, higher Treasury yields and a steeper yield curve, all else equal.

• Divided government: We view a Republican president/Democratic Congress (or vice versa) as the election outcome most likely to yield some fiscal policy tightening on the margin. A partial expiration of the TCJA probably would modestly depress the 2026 outlook for growth, inflation, government borrowing and yields.

• Democrats sweep: A sweep by the Democrats could also lead to more fiscal policy accommodation, but we suspect Democrats are more inclined to offset new policy initiatives with higher taxes, particularly for higher-earning households and corporations. From an accommodation standpoint, we view this scenario as somewhere between the Republican sweep and divided government scenarios.

Serious long-run fiscal challenges are likely to remain regardless of the 2024 election outcome. Even if the TCJA expires in full as scheduled, federal budget deficits are poised to remain wide in the years ahead (5-6% of GDP) in the absence of even higher federal taxes, entitlement reform or much lower interest rates.

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