The results of next week's midterm elections 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.

• If the polls prove correct, Republicans will win a majority in the House and, possibly, the Senate.

Why it matters: If they win one or both houses, Congressional Republicans could seek major policy concessions in exchange for acquiescing on spending and debt issues, as they did in 2011 and other episodes.

• That creates a layer of uncertainty as the economy faces a strong possibility of a recession. 

Flashback: Strategists are all but certain there will be a fiscal showdown similar to the one in 2011. At the time, Republicans refused to raise the debt ceiling without drastic concessions on government spending — bringing the country to the brink of default.

• The ultimate compromise then set in motion a series of automatic spending cuts known as the "sequester."

State of play: The debt ceiling, a legal cap on federal borrowing, was raised last year and will sustain the government until next summer, according to the Committee for a Responsible Federal Budget. At that time, it will need to be raised.

• Some Republicans have hinted at plans to use the debt ceiling as a high-stakes negotiating tool to push for spending reductions and entitlement reform. But just how extreme those demands are may depend on the makeup of the House. 

What they're saying: GOP hardliners are "going to push for a more aggressive stance on spending than the rest of the party, and party leadership, would want to," says Brian Gardner, chief Washington policy strategist at Stifel.

• "If [House Minority Leader] Kevin McCarthy is dealing with only a 20 seat majority or less, that gives the Freedom Caucus a lot of sway to block anything they don't like," says Gardner.
• In recent episodes, "I think people have just come become accustomed to 'yes, there's going to be drama but at the end of the day it will get done,'" says Rob Dent, an economist at Nomura. "But next year could be different, just because of how much more willing Republicans may be to push it to the limit."

What to watch: It's not just the debt ceiling. A divided government also means fiscal support is less likely if the economy falls into a deep downturn.

• "The 'fiscal put' is likely going to be taken off the table, meaning that Congress is not going to necessarily provide a floor to the economy, should it slow," says Libby Cantrill, head of public policy at PIMCO.

All that said, this is a very different economic moment than 2011. Back then, the problem was high unemployment, low inflation and interest rates stuck at zero — making spending cuts counterproductive.

• Now, the problem is rising interest rates and high inflation — an environment in which spending cuts could be helpful.

Yesterday, the official White House Twitter account offered an unusual message about the upcoming cost of living adjustment Social Security recipients are set to receive at the start of 2023.

• "Seniors are getting the biggest increase in their Social Security checks in 10 years through President Biden's leadership," said the tweet, blasted to the account's 8 million followers.
• Shortly before this newsletter was sent, the White House deleted the tweet, following extensive social media criticism along the lines explained below.

Fact check: It struck us as a too-clever-by-half framing of the upcoming bump in retirement and disability benefits, for multiple reasons.

• It is true that benefits are set to rise 8.7% in January, the most since 1981 (41 years ago, not the 10 years indicated by the White House tweet).
• Yet that is set not by presidential action, but by a formula tied to the Consumer Price Index that has been set in federal law for decades.
• In other words, the bump is happening because bureaucrats at the Social Security Administration did basic arithmetic based on inflation statistics. (We detailed the math here.)

More fundamentally, the cost of living adjustment is high because inflation has been high. So to the degree Biden's leadership is responsible for the benefits bump, it implies the president is responsible for high inflation — not the message the White House has generally sought to deliver.