President Biden’s FY22 Budget assumed 2.2% inflation. On October 12, the Bureau of Labor Statistics reported that the inflation for FY22 was 8.2% with a core inflation rate of 6.6%, a 40-year high. Biden’s rosy election-year FY23 Budget assumed a 2.3% inflation rate beginning October 1. We expect inflation to remain persistent well into 2023 due to a number of factors including Russia’s invasion of Ukraine, and for the US and global economy to slow with major markets sliding into recession.
IT’S THE ECONOMY STUPID!
Made famous by former Clinton campaign advisor James Carville in 1992, this quote is a reminder that the economic outlook for workers is often the most important factor in presidential elections. According to RealClearPolitics, 58.7% of Americans disapprove of President Biden’s handling of the economy. Biden’s job approval rating surged from 36.8% on July 22 to 43.2%, but it remains well below the 50% threshold that recent history suggests is needed for the President’s party to make mid-term gains in Congress.
Despite wild variations in individual races, America remains closely divided. A month ago, it looked like nine races – AZ, FL, GA, NC, NH, NV, OH, PA and WI – would ultimately determine control of the Senate. Since then, polling data suggests that Democrats have pulled ahead of Trump-backed GOP candidates in AZ and NH. Republicans have made gains in FL, NC, and WI. The NV, OH, and PA races have tightened, and controversy has swirled around Herschel Walker in GA. Although several races remain within the margin of error, the net effect has been to narrow the range of potential results and reduce prospects that Democrats pick up more than two Senate seats and that the GOP takes over the Senate.
FIBQ’s House forecast remains unchanged with Republicans favored to gain control of the House by a narrower margin than recent mid-term election results would suggest.
OPERATIONAL IMPLICATIONS
The most likely result of the mid-term elections will be two years of legislative gridlock with operational implications for the White House, Congress, and agency planners. Highlights include:
Budget decisions will be episodic and driven by action-forcing events, not the Congressional Budget process. The two most significant are 1) expiration of appropriations that would trigger a partial government shutdown and 2) expiration of the current federal debt limit that would likely trigger a default and debt downgrade in financial markets. Current forecasts put that timetable in the second half of 2023. A slowing economy could accelerate that timetable with increased safety net spending and lower-than-projected revenues.
Prospects for approval of major spending increases in the 118th Congress will be diminished.
Narrow House and Senate margins severely limit GOP efforts to rollback major initiatives approved over the past two years.
A continuing resolution (CR) is often a budgetary and operational safety valve. That won’t be true in FY24 (other than for short-term CRs). During the first year after each government transition, a CR limits the influence of the party that gained power in the most recent election. President Biden and Congressional Democrats wrestled with that problem in FY22. In FY24, a CR would severely limit House Republican efforts to boost defense spending and roll-back Biden administration initiatives at EPA, the IRS, etc.
The Biden Administration will lean more heavily on Executive Orders, regulations, and other executive actions to advance its policy priorities. Their agenda is likely to shift billions in costs from government to key private sector industries.
Republicans ramp up Congressional oversight of the Administration.
A complicating factor in all this will be President Biden’s decision on whether to seek re-election in 2024. We expect that to occur by March 2023. If Biden chooses not to run, expect friction between the moderate and progressive wings of the Democratic party to increase and limit legislative prospects on a host of issues.