Prospects for policymaking in a divided government

We subjectively assign a greater probability of a divided government after the 2024 elections rather than one that is fully controlled by Republicans or Democrats. After considering the prospects for policymaking under a Republican trifecta, we modeled the macroeconomic impact of a divided government with either of the two leading presidential candidates at the helm.

What you will learn:

• If Biden is reelected but presides over a divided government, the upside risk potential to the economy from fiscal policy is limited. The next debt-limit battle could be nasty, and we would expect to see more restraint imposed on federal spending. This partisan rancor will likely seep into the debate over the expiring provisions of the 2017 tax law, although lawmakers will pass the bare minimum of extensions to prevent taxes for individuals rising meaningfully in FY2026.
• If Trump returns to the White House with a divided government, he will have a tougher time enacting his fiscal agenda. While he will seek to preserve as much of the 2017 tax law as possible, Democrats will work to reshape the law so that its benefits skew less toward higher-income taxpayers. The overall tax cut is larger in this scenario than in the divided Biden government scenario, but it is still less than if Republicans fully controled government. With his fiscal agenda limited, Trump will take unilateral action on trade and immigration. Growth and inflation are stronger in this scenario compared to the other divided government scenario.