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August 30, 2024 | 13:16
U.S. Election: Polls and Policy Prognoses
Economics
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Fixed Income Strategy
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Fixed Income Strategy
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U.S. Election: Polls and Policy PrognosesWith the U.S. election campaign heating up, we review the implications of key policy plans from the leading Presidential candidates. |
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Traditionally, after the Labour Day holiday, U.S. elections heat up with the first Tuesday in November fast approaching. The battle for the White House has tightened since President Biden’s decision to no longer seek re-election on July 21 and Vice President Harris becoming the party’s official nominee on August 5, the latter having been celebrated at last week’s Democratic National Convention. The altered top of the ticket has improved Democratic prospects, not only in the presidential campaign but also in some congressional races. Meanwhile, the Democratic confab along with last month’s Republican National Convention were occasions around which both parties and presidential candidates could introduce new policy proposals and trot out the old ones. PollsHere’s how things currently stand, according to Real Clear Politics (RCP):
On balance, election prospects have improved for the Democrats since Biden bowed out. On the generic ballot (What party would you vote for?), the polls have flipped from averaging a 0.8 ppt Republican advantage (as of July 21) to now averaging a 0.8 ppt Democratic advantage. This is shrinking prior GOP leads in the most critical state-level races and even flipping some to the Democrats. It’s also casting more uncertainty over the ultimate outcomes. Policy Prognoses |
When it comes to fiscal policy, the differences between the two candidates and their parties are diametric. Vice President Harris and the Democrats have no problem increasing both spending and taxes, relying on the latter more than restraining outlays to control the deficit. As we saw with the American Rescue Plan Act (2021), spending priorities won’t be deterred by deficit concerns. By contrast, Donald Trump and the Republicans are inclined to cut taxes and constrain spending, with the latter being the main channel for budget control. As we saw with the Tax Cuts and Jobs Act (2017), tax priorities trump deficit concerns. Enacting legislation that emphasizes these stark policy differences requires a trifecta (a party winning the White House and control of both congressional bodies). Before July 21, the GOP appeared to have the greater chance of achieving a trifecta, but since then the odds have been ebbing. |
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This January, as a new Administration and Congress take hold of the fiscal levers, they will face challenges, regardless of who is in the White House and which party controls the House and/or the Senate. According to the Congressional Budget Office (CBO), the deficit for fiscal year 2025 (which begins this October 1) is forecast at $1.94 trillion or a large 6.5% of GDP. This is the CBO’s baseline projection based on legislation enacted through May (Chart 1). The 10-year cumulative deficit is projected to be $22.1 trillion and averages 6.3% of GDP. During the next decade, the fiscal picture first improves, owing to the expiry of the 2017 tax cuts, before deteriorating. The latter is mostly due to rising mandatory outlays (e.g., Social Security and Medicare) and net interest payments. For fiscal 2027, the deficit improves to $1.76 trillion or 5.5% of GDP, before worsening to nearly $3.0 trillion or around 7.0% of GDP by the end of the decade. The interval-ending jump mirrors the projected insolvency of Social Security’s Old-Age and Survivors Insurance Trust Fund in 2033 (with the Medicare Hospital Insurance Trust Fund slated for the same three years later). When these trust funds become insolvent (meaning current and accumulated surplus contributions no longer cover benefit payments), the residual funding of these mandatory outlays shifts back ‘on-budget’. That adds directly to the deficit. |
The debt issuance required to finance this run of large budget deficits will cause debt held by the public to soar to record highs as a percentage of GDP (Chart 2). The ratio is projected to top 100% in the fiscal year about to begin, for the first time since the World War II era. It will top the previous record high of 106.1% (1946) in 2027. The subsequent run of record-high debt ratios should apply some upward pressure on interest rates while increasingly constraining fiscal flexibility and risking an eventual fiscal crisis. And the initial fiscal improvement described by the CBO owing to the expiration of the 2017 tax cuts is unlikely to occur. Both parties have, in the past, indicated intentions to extend at least some of the tax provisions. More recently, Trump has proposed extending all of them, not only those related to individual income taxes (the lion’s share) but also those related to estate and gift taxes, along with the tax treatment of investment costs and other business tax provisions. The CBO estimates this will increase the 10-year deficit by $4.6 trillion (including increased interest outlays). |
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The Biden Administration originally proposed extending the individual tax provisions for those making under $400,000 and offsetting the deficit impact with some of the revenue from even higher taxes on rich folks and an increase in the corporate tax rate from 21% to 28% [2]. Last week, the Harris campaign indicated that the Vice President supported all these proposals. And some of these revenues will help fund the new package of proposals to lower costs for American families (announced August 16) [3]. This week, the Penn Wharton Budget Model (PWBM) initiative released its analyses of the proposals the two presidential candidates have announced so far (that have sufficient detail) [4]. For Trump, in addition to extending the 2017 tax cuts in their entirety, the proposals include eliminating taxes on Social Security benefits and lowering the corporate tax rate to 15% from 21%. PWBM concluded the Trump proposals would increase the 10-year primary deficit by $5.8 trillion. The net positive economic feedback effects from lower taxes would reduce this to $4.1 trillion. For Harris, the above-mentioned package of proposals included expanding the Child Tax Credit, expanding the Earned Income Tax Credit, permanently extending the tax credit that lowers health insurance premiums, and providing down-payment support for first-time homebuyers. Raising the corporate tax rate from 21% to 28% was also part of the analysis. PWBM concluded the Harris proposals would increase the 10-year primary deficit by $1.2 trillion. But the net negative economic feedback effects from higher taxes would boost this further to $2.0 trillion. We have issues with the PWBM results. First, the analyses focus on the primary deficit, i.e. the budget balance before net interest is included. Net interest is becoming a major driver of the total deficit’s deterioration owing to rising debt levels and relatively higher interest rates. The Trump proposals, by resulting in a larger cumulative deficit (debt), stronger growth and likely higher inflation (than in the CBO baseline or Harris proposals) should generate relatively higher interest rates. This in turn should result in a relatively higher profile for net interest that increasingly augments the primary deficit, making the deterioration in the total deficit look even worse. Second, the Trump analysis does not include the impact of his tariff proposals (10%-to-20% across-the-board on all imports and an overall 60% on Chinese products). The exclusion reflected the uncertain fiscal and economic ramifications of retaliation. While there are offsets here, we judge the net impact of tariffs will be higher inflation and slower real economic growth than would otherwise be the case, along with a worse deficit profile. Third, Harris’ support for the revenue proposals in the President’s 2025 Budget were not included in the analysis. Although the Vice President is already deviating from the budget’s spending proposals, we reckon it will still be a framework for Harris’ overall fiscal plans. The President’s budget sported net deficit reduction as higher spending was offset by even higher taxes. Despite these issues, the PWBM analyses do emphasize the diametric differences between the two presidential candidates and their parties when it comes to fiscal policy. As mentioned earlier, Harris and the Democrats have no problem increasing both spending and taxes, relying on the latter to control the deficit. By contrast, Trump and the Republicans are inclined to cut taxes and constrain spending, with the latter relied on for deficit control. The starkness is likely to become clearer over the next two months of campaigning as even more polices are proposed. [1] Each state has electoral college votes that total their number of seats in the U.S. Senate, which is always two, and in the U.S. House of Representatives. The latter ranges from one (for Alaska, Delaware, North Dakota, South Dakota, and Wyoming) to 38 for Texas, and 52 for California. The fewest votes a state can have is three which is also the amount given to the District of Columbia. Nearly all states award their electoral votes entirely to the candidate who wins the statewide popular vote. The two exceptions are Maine and Nebraska; they award based on the popular vote winners in their congressional districts. [^][2] https://www.whitehouse.gov/wp-content/uploads/2024/03/budget_fy2025.pdf [^][3] https://mailchi.mp/press.kamalaharris.com/vice-president-harris-lays-out-agenda-to-lower-costs-for-american-families [^][4] The analysis of Harris’ proposals is here… https://budgetmodel.wharton.upenn.edu/issues/2024/8/26/harris-campaign-policy-proposals-2024. The analysis of Trump’s proposals is here… https://budgetmodel.wharton.upenn.edu/issues/2024/8/26/trump-campaign-policy-proposals-2024. [^] |