2025 political outlook
Managing Director, Washington Policy Analyst Ed Mills looks at how several of the top market-relevant Washington DC issues could play out in 2025.
To read the full article, see the Investment Strategy Quarterly publication linked below.
Key takeaways:
- The key market-relevant policies of the Trump administration will be: Tariffs, the debt limit, appointing key personnel, budget reduction and tax cuts.
- Trump's appointments seem to indicate his seriousness about aggressive policies on tariffs and trade policy. Tariffs may also be used as a negotiating tool.
- The timing, magnitude and tempo of these policies is still uncertain and we'll be monitoring market reaction closely.
The election of Donald Trump to a second term and the GOP sweep of Congress is a repeat of the 2016 election, but we see a considerable debate about the agenda for his second term. Echoing his first term, tax change, tariffs, and immigration all remain at the top of his agenda. In the ‘what’s new’ camp we highlight a much smaller Republican House majority (in the single digits, compared to the 23-seat majority of 2017), but more Congressional allies and a more robust transition team. A key dividing line for the 2025 policy agenda will be agenda items that can be achieved through executive authorities (including tariffs and immigration), and those requiring Congressional authorization (such as taxes and the debt limit). It will likely be full speed ahead for many of those executive- driven actions given Trump is seeking to avoid the multi-year negotiations that delayed his first term agenda.
The small House majority will introduce new hurdles to the passage of key fiscal legislation, including raising the debt limit, extending the 2017 Tax Cuts and Jobs Act ahead of its expiration in December, and any desired changes or repeals to the 2022 Inflation Reduction Act. A guiding principle for watching Trump 2.0 will be to expect the unexpected and we expect to see frequent diversions from the traditional DC playbook.
Tariffs
Tariffs have formed the centerpiece of Trump’s fiscal and foreign policy agendas, and our base case is that tariffs (including those targeted at specific countries, as well as a global tariff), are coming, but the specifics remain up in the air. The pre-inauguration announcement of the tariffs underscores a key dynamic in Trump’s tariff strategy: His desire to negotiate and make deals. The timing should be viewed as an initial attempt to bring potentially impacted countries to the negotiating table early on. Trump will highlight in his negotiations that each country can avoid these tariffs by addressing his concerns, but his wish to negotiate does not mean he will not follow through on his tariff threats if a desired outcome is not secured. Trump has a range of authorities at his disposal to implement his suite of tariff proposals which also includes the authority to impose a 10-20% global tariff. Several of those authorities would allow him to implement new tariffs almost immediately, and even for tariffs with longer procedural requirements, we would expect those to move relatively quickly.
Personnel is policy
Key to the policy specifics and implementation of priority agenda items will be the personnel appointed to manage those issues. While Trump announced his cabinet picks and other key appointees throughout November and December, the fate of many of his selections will lie with the Senate confirmation process. The Republican Senate majority and a push for deference to the president will mean that many will be confirmed, but some of the more controversial picks will face an uphill battle.
Debt limit
Alongside personnel confirmations, the return of the debt limit will be a top priority in the early days of the new 119th Congress. While we expect the debt ceiling to eventually be raised, the narrow House GOP majority, the number of Republican members of Congress who have never and will never vote to raise the debt limit and the political drama previewed in the December 2024 government funding debate will likely introduce volatility to the process. The debt limit is subject to a 60-vote threshold in the Senate, requiring Democratic support for its passage. Using the last debt limit debate as a guide, we would expect the X-date (when the US government can no longer fulfil its debt obligations through the use of extraordinary measures) to fall roughly mid-year, and the debt limit debate will accordingly become a priority in the first half of 2025.
DOGE and the budget
Trump’s announcement of the Department of Government Efficiency (DOGE), to be led by Elon Musk and Vivek Ramaswamy, has pushed the US budget and its process into the spotlight. We expect DOGE to have the most success in its push for deregulation, aided by a series of Supreme Court rulings that will make it easier to challenge existing regulations. Their effort to reduce government spending will be a more difficult challenge.
Tax cuts
The individual portions of the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire on December 31, 2025. The cost of a ten- year extension is estimated at $4.6 trillion, and President Trump has promised additional changes to the tax code as part of this extension. Most of the corporate tax changes, including the 21% corporate tax rate, were made permanent in 2017, while several important business provisions that incentivize investment in new equipment have expired and are part of the extension conversation. We expect Congress to use the budget reconciliation process to pass this tax law, as it only requires a simple majority in the House and Senate (no 60-vote Senate filibuster) for passage. As such, we expect the bill to pass on a party-line vote. The lower vote threshold does not guarantee smooth sailing, as the House majority is razor thin.
Read the full
Investment Strategy Quarterly
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