With a “financially conservative” outcome considered to be the most important for the country, Goldman-Sachs, in a recent research note, says that re-electing Obama and a divided Congress is the best way to go.
There are several reasons why the firm thinks that maintaining the political status quo is paramount. Firstly, with a Republican-controlled Congress, the modification of the proposed budget cuts scheduled to take place in 2013 would be offset if Congress was controlled by Democrats.
Secondly, if Republicans continue to control Congress would mean that the Bush tax cuts would most likely be extended, and which result in an increase of the deficit. Similarly, Democrats would extend the payroll tax cuts into 2013. However, Goldman-Sachs considers the second option to be one that of less fiscal restraint compared to that of the Bush tax cuts.
A key finding of this research note indicates that in keeping the status quo of Congress, legislators on both sides will be forced to find a tax compromise that would lead to a tax increase in the future.
Lastly, with the Democratic Party controlling Congress, it’s more likely that additional stimulus spending on infrastructure investments and hiring incentives might be possible but with the GOP in charge of Congress, these initiatives are less likely to materialize.
In conclusion, a divided government means fiscal restraint in the following year as opposed to any other scenarios. Even though these predictions are only for 2013, one point of contention that the Republicans will have, according to the findings in this note, is that bigger tax cuts would lead deficit reduction, by increasing economic growth.
Yet the firm also clearly states that the impact of electoral outcomes on the country’s longer-term fiscal health is anything but clear.