Managing Director, Washington Policy Analyst Ed Mills breaks down the 2024 race for Congress and key issues Washington D.C. will tackle in 2025.
To read the full article, see the Investment Strategy Quarterly publication linked below.
With most of the focus of the 2024 elections on the rematch between President Biden and former President Trump, the race for Congress can easily get overlooked. Our analysis for the Senate shows a solid advantage for Republicans to win a majority of seats. In the House of Representatives, it is a closer call, but several factors have Democrats as the slight favorite for the majority. With divergent House and Senate calls, it is easy to assume that divided government is the most likely outcome, but we come to a different conclusion. In our view, if Democrats beat the odds and retain a Senate majority, that likely comes with a Biden reelection and a House majority. Conversely, if Republicans maintain a House majority, the chances of a Trump victory and Republican Senate majority also increase. As such, the combined odds of either a Republican or Democratic sweep should be considered. In a sweep, the ability to advance major policies on a party-line vote increases –important for the return of the debt limit in January 2025 and the expiration of the 2017 individual tax cuts on December 31, 2025.
In assessing the presidential race there are multiple factors we actively track, including: which states are critical for each candidate as they seek 270 electoral college votes; the favorability of each candidate; and general sentiment of the country – such as recession indicators and polling data on whether voters view the country as “on the right or wrong track.” At this time, both President Biden and former President Trump have more voters who have an unfavorable opinion than a favorable opinion, making it necessary for the winning candidate to convince some portion of voters to vote for him, despite having a negative opinion of his candidacy. The group of voters who have an unfavorable opinion of both candidates are referred to in the polling industry as ‘double haters.’ In 2016 Trump won a majority of this group and the presidency. In 2020, Biden won the majority of this group and the presidency. The winner of this group in 2024 is likely the winner of the presidency.
The largest policy changes in DC come when one party has full control of the House, Senate, and the White House. In recent years, Congress has been using the budget reconciliation process to enact sweeping legislation, including tax cuts, the Inflation Reduction Act, COVID relief, and major portions of the Affordable Care Act.
In 2025, we have two fiscal cliffs that Congress must address: the debt limit and the expiration of the individual portions of the 2017 Trump-era tax cuts. The winner of the presidency will largely dictate the terms of these debates, but the ability to enact sweeping changes would be unlocked if either party has full control.
In the House, where all 435 seats are on the ballot, Republicans currently have a 218-213 majority. Democrats will need to net five seats to win the majority and they should get some assistance with several states adjusting their congressional districts. The fights over the Speaker of the House have also slowed some Republican fundraising compared to past election cycles, adding to the Democrats' edge. However, with only 22 seats currently rated as toss-up and recent elections swinging the House toward the winner of the presidential election, a majority by either party remains a possibility.
In the Senate, Democrats currently have a 51-49 seat majority, but are likely already down to a 50-50 majority when you factor in the upcoming retirement of Senator Joe Manchin (D-WV). In the Senate, one-third of the 100 seats are on the ballot every two years. This year, of the 34 seats on the ballot, 23 are currently held by Democrats and 11 by Republicans. The imbalance of seats comes from a strong performance by the Democrats six years ago in the 2018 midterm elections. Democrats are even more on the defensive in the Senate when you factor in the decline of ticket-splitting in recent years. Top Republican targets are the Democratic senators in Montana and Ohio, two states expected to vote for Trump in November. Despite a strong playing field for Republicans, we have also seen unexpected events in recent Senate elections, and it is not out of the question that Democrats are able to run the table and preserve a 50-50 tie. In a tie scenario, the vice president is the tie-breaking vote.
The debt limit will be an immediate concern for the next president, with it returning in January 2025 as either Trump or Biden is inaugurated for a second term. At midnight on January 1, 2025, the federal government will begin to deploy extraordinary measures to stave off a default; using the 2023 debt limit process as a guide, we expect that the X-date (the date when the federal government is no longer able to meet its debt obligations) will fall during midyear. With a $35 trillion national debt and an almost $2 trillion annual federal budget deficit, and more than a $1 trillion annual debt service burden, lifting the debt limit has both political and market implications.
The return of the debt limit will raise the risk of brinkmanship, with negative impacts for volatility and broader market sentiment. A split government scenario would likely exacerbate these risks, as well as placing pressure on both parties to accept serious policy concessions to avert a default – especially if current concerns around the US fiscal trajectory continue to intensify. These concessions could include repeals to parts of the 2022 Inflation Reduction Act; while we do not expect the law to be fully repealed (even under a GOP sweep), certain provisions (such as the electric vehicle (EV) tax credit) could be targeted to offset the cost of new debt issuance. The debt limit is extremely likely to be lifted, but we could see the creation of a new effort to rein in the debt and deficit (with actual cuts unlikely in the near term).
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Investment Strategy Quarterly
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