U.S. mid-terms likely to blunt recession response

Moody’s Investors Service says legislative gridlock is the most likely outcome of the U.S. mid-term elections, making a fiscal response to stimulate the economy unlikely.

In a new report, the rating agency said the Nov. 8 congressional elections will decide U.S. policy for the next couple of years.

“Political observers view the most likely outcome as some form of divided government, with Republicans gaining control of the House of Representatives, while the balance of power in the Senate is currently seen as a toss-up,” it said.

Either scenario would lead to increased political gridlock — intensifying the risk of a government shutdown in 2023 — and leaving only a few areas open for possible bipartisan co-operation, including  energy security and digital asset/crypto regulation.

“A divided government would make it difficult to pass any material increases in government spending or tax policy changes,” Moody’s said. That means that if the U.S. were to fall into recession, an expansionary fiscal policy response would be unlikely.

“In the event of a divided government, expanding spending or cutting taxes to stimulate an ailing economy would be unlikely, which would risk stroking inflation,” it said.

The trajectory of government finances is unlikely to change, the report said: “We expect the federal debt burden to remain stable through 2025, supported by smaller annual fiscal deficits and steady nominal GDP growth.”

Longer term, Moody’s expects the debt burden to rise to about 113% of GDP by 2032.

Staff

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