First the Election, Now the Governing: Fiscal Policy Priorities, Challenges, and Implications

The dust looks to have (mostly) settled on the 2020 U.S. election: We share the market consensus view that Joe Biden is the president-elect, although the Trump administration continues to challenge the results. Democrats have kept their majority in the House of Representatives, albeit one that is diminished; and Republicans are likely to keep a narrow majority in the Senate, barring a surprise outcome in January’s runoff races in Georgia.

As of this writing, markets seem to anticipate a divided Washington in 2021. The fiscal-stimulus-fueled reflation that markets had started to price in ahead of the election now looks unlikely in the near term, but tax hikes are likely off the table as well. While we still expect growth to reaccelerate later next year, thanks to some more modest stimulus and an improving public health situation, a broader recovery will take time and economic activity likely won’t recover to 2019 levels until late 2021.

What could happen under a split government?

Without a full Democratic Congress, the Biden administration will have to pivot its policy priorities toward areas of bipartisan agreement:

  • A COVID relief bill: While we could see movement on another round of COVID-related stimulus during the lame duck session of Congress, we believe it is more likely in 2021, in which case we expect it will be priority #1 for Biden and a new Congress. However, we anticipate the size of the deal to be materially smaller than what had been considered as recently as just a few weeks ago – probably around $1 trillion.
  • Drug pricing and healthcare: While Democrats’ hopes for a big healthcare bill are likely dead-on-arrival in a Republican-controlled Senate, we could see some agreement on prescription drug pricing reform and potentially on a bigger healthcare bill (addressing pre-existing conditions) if the Supreme Court rules against the Affordable Care Act and forces Congress’ hand.
  • A relatively modest infrastructure bill: The FAST Act, which authorizes the Highway Trust Fund, the primary mechanism that funds U.S. highways, is up for authorization in 2021. This could be a legislative vehicle for a bigger bill, but nothing like the multi-trillion-dollar climate-oriented infrastructure legislation that Democrats were hoping to pass. There is also some bipartisan support for a large broadband build-out, which may be possible.

What is not likely to happen?

Without full Democratic control of Congress, several areas of the Biden campaign’s proposals will not even be considered. Most notably for markets, tax changes are off the table, and corporate and individual tax rates will likely stay where they are. Reinstating the state and local tax (SALT) deduction is likely a non-starter as well.