The U.S. Republican party will probably retake the House of Representatives from Democrats in the Nov. 2 elections and fall just short in the Senate. Whatever the exact electoral results, it seems certain the GOP is poised for a major upgrade in political influence. Herewith, Breakingviews offers a primer on how the shifting balance of power may sway key financial and economic issues in the coming year.
The Bush administration’s 2001 and 2003 tax reductions on labor and investment income are scheduled to expire at the end of 2010. The Obama administration and Democratic congressional leaders want to extend only those cuts affecting family income under $250,000. Republicans want to extend all the cuts for at least two years. The GOP will push this issue hard, whether in the post-election “lame duck” period or in 2011 when the next Congress is seated. President Barack Obama’s position is unclear. For all his tough campaign rhetoric against extending the high-end cuts, he has not threatened to veto a temporary extension.
What to expect: Action might be delayed until sometime in January, but the Bush tax cuts are likely to be given another year or two of life. That’s because Republicans are unified on the issue, including moderates who fear Tea Party primary challenges in 2012 if they blink. And the anemic U.S. economic recovery has drained much of the fight from congressional Democrats. One possible compromise might see Republicans approve Obama’s plan for a national infrastructure bank.
The bipartisan deficit panel appointed by the president is scheduled to vote on recommendations by Dec. 1. It needs 14 of 18 members to agree on any recommendation a) for balancing the budget, excluding debt interest payments by 2015 or b) to “meaningfully improve” the long-run gap between spending and revenue. While Congress does not have to vote on its findings, the bipartisan panel will greatly influence the fiscal agenda on Capitol Hill.
What to expect: Republicans on the panel are being pressured to reject tax increases, while Democrats will resist cuts to Social Security benefits. But any deal struck will likely revolve around the old-age social insurance program. As in other developed countries tightening their belts like the UK and France, seniors may be asked to work longer before getting full benefits, and the wealthier among them may get fewer benefits or pay more in taxes. One potential surprise would be a deal on tax reform that would see a simplification of the tax code and reduction of loopholes. But Congress may come up with its own approaches. The likely top GOP budget writer, for instance, has already designed a detailed deficit reduction plan.
Passing the sweeping Dodd-Frank bill last summer was only the first step. Now bureaucrats must begin implementing new rules about liquidating troubled financial institutions, limiting risky bank activities and creating an agency to regulate consumer financial products. But Republicans say they want to roll back some of the reforms, charging they will hurt consumer lending and lead to more bank bailouts.
What to expect: Obama would surely veto any major changes to the legislation. But the enlarged GOP presence on key congressional committees will give the party greater ability to pressure regulators as they fine-tune details of the new rules. It will also be easier for Republicans to block policies and personnel they disfavor.
The administration’s bank tax to compensate for any losses in the Troubled Asset Relief Program has little chance of passing in its present form. It may resurface later as a way of repaying taxpayer funds injected into mortgage lenders Fannie Mae and Freddie Mac. The most likely scenario is that reforming those institutions gets delayed until after the 2012 presidential election. A wild card is the ongoing foreclosure mess. Democrats may push for a national moratorium during the lame duck session. And continued housing weakness may compel a bipartisan attempt to bolster housing.
This may be one of the few areas where Democrats and Republicans can find some common ground. A majority of House Republicans recently voted with Democrats to penalize countries, such as China, that keep their currency cheap to subsidize exports. There are also three completed bilateral trade agreements waiting for congressional approval.
What to expect: The Senate may pass the currency bill, although a veto by Obama still seems likelier than not. The prospects are better for the trade deals with Colombia, Korea and Panama. All are favored by Republicans.
Obama’s plan for a cap-and-trade system to reduce carbon emissions passed the House but never made it through the Senate. Republicans unified against what they called “cap-and-tax,” as did many Democrats from coal-producing states. The whole idea also seemed off-point to voters worried about jobs.
What to expect: Republicans profess an “all of the above” approach toward energy, supporting both nuclear and alternative energy. Both parties and the administration will likely support added incentives and even a bit more increased direct spending on government research on renewable energy. But it seems unlikely there will be any successful attempts to put a price on carbon, even though some potential GOP presidential candidates tentatively support doing so. Republicans may also try to limit the ability of regulators to limit carbon emissions without congressional approval.