Nov 7, 2022 - Economy

GOP midterm wins could bring back austerity politics

Illustration of a penny as a fire alarm bell

Illustration: Eniola Odetunde/Axios

Republican victories in Tuesday's midterms could usher in a new era of austerity in American politics.

Why it matters: Congress plays a big role in stimulating economic demand, which is keeping inflation high.

What they’re saying: “If Republicans win the House, Senate, or both, gridlock will ensue and therefore limit significant increases in federal spending. This will be viewed as a less inflationary outcome by financial markets,” Daniel Clifton, partner at Wall Street research firm Strategas, wrote this week.

The big picture: Fiscal showdowns between the White House and a GOP-led Congress would reverberate in the fight against inflation and the perennial battle over whether to raise Uncle Sam’s statutory credit limit.

  • As Axios Macro co-authors Neil Irwin and Courtenay Brown wrote last week, the midterms “could create a new dynamic around U.S. fiscal policy — including a return to intense standoffs around the debt ceiling and federal spending that tend to rattle markets and fuel uncertainty.”

And it's not just about the debt ceiling. Although the Biden administration recently crowed about a dramatic halving of the federal deficit, critics point out that it was largely attributable to the end of COVID-related emergency spending, and the current path of government outlays is unsustainable.

  • “As we enter the new fiscal year and finish out the calendar year, policymakers need to reverse course,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said in a statement. “With inflation surging and interest rates rising, we need deficit reduction.”

What we're watching: The contours of an austerity strategy, should the GOP lead the 118th Congress, are already beginning to emerge.

  • Battle lines are being formed around Social Security and Medicare, setting the stage for broader skirmishes over how much to contain spending.

And the 2024 general election looms large. Tax and spending fights could easily last into the next presidency.

  • “The GOP has a much bigger opportunity to expand its Senate playing field than the Democrats in 2024,” according to Jon Lieber, managing director at Eurasia Group, which "would give the Republicans a shot at a 60-vote supermajority in the Senate, an incredible comeback just 6 years after the party lost the Senate in 2018."
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