In this Issue:

  • Senate Outcomes and the Economic Agenda
  • The Case for Additional Stimulus
  • Brexit Is Done, but Not Dusted

This week’s scene in the U.S. Capitol is one none of us will soon forget. Divisions within the U.S. populace run deep. We hold out hope they can be bridged through more productive means than Wednesday’s revolt. The incoming Senate has an opportunity to take the lead in restoring a shared national purpose…and in reinforcing the U.S. economy.

Prior to this week’s run-off elections, our legislative outlook called for continued gridlock. But Georgia voters sent two more Democrats to the Senate, meaning the chamber will have 50 representatives from each party. Any tie votes will be broken by the Democratic vice president-elect, opening the way to a more active legislative agenda. Yet while the scope for new actions has widened, it is not unlimited.

In the near term, the prospects for further COVID-related fiscal support have improved. The latter half of 2020 revealed a bipartisan willingness to pass some form of stimulus, but compromise was persistently out of reach among the House, Senate, and White House. With those components now aligned (albeit narrowly) under one party, progress should become easier to achieve.

As discussed in the following article, the package ratified at the end of the year kept its cost in check with smaller payments and shorter timespans for support. It will prove insufficient to tide the economy over to the first half of 2021. The new Congress will likely make supplemental economic impact payments ($1,400 per person has been proposed) an early order of business. Other relief is likely to accompany this measure.

Tax increases, which had appeared to be off the table, may be employed to help pay for the budget expansion. Though fiscally defensible, this would be difficult to prioritize. Tax hikes are unpopular under any conditions, and increasing the tax burden at the outset of a growth cycle would be especially poor timing. Tax code changes, if any, are likely to be marginal, such as small increases to income tax rates for the highest earners or a repeal of the step-up in basis for inherited capital gains.

It is important to note that while some fiscal measures can be passed with a simple majority, others require a larger plurality. The budget reconciliation process allows entitlement spending and revenue provisions to be passed with 51 votes. Beyond that exception, bills must be approved by 60 senators to end a filibuster, allowing a minority of senators to stop legislation.