First, the firm believes that if Republicans controlled both houses of Congress and/or the administration, they would try to delay the defense sequester and otherwise modify the scheduled budget cuts, as GOP legislators have already proposed. Full Democratic control, on the other hand, could also result in changes to the sequester that would delay budget cuts in 2013. Goldman Sachs believes that maintaining the status quo would make it more likely that the sequester would end up taking effect in 2013 as scheduled.
Second, Republican control of the White House and/or Senate majority would also mean that a full extension of the Bush tax cuts would be far more likely, increasing the deficit. Full Democratic control would also be “the only scenario” in which an extension of the payroll tax cut into 2013 would happen, Goldman concludes. This would be a much smaller change than extending the Bush tax cuts, but it would also move us in the direction of less fiscal restraint. Under the status quo, Goldman Sachs believes that legislators would be forced to reach a tax compromise that would increase the potential for a tax increase.
Finally, full Democratic control would increase the likelihood of additional stimulus spending, through infrastructure investments, hiring incentives, and the like. Under a GOP-controlled government or the status quo that would be unlikely.
In the end, “divided government is maintained probably means slightly more fiscal restraint in 2013 as a whole than other possible scenarios,” Goldman concludes. Republicans, in particular, are likely to dispute the firm’s findings, believing that bigger tax cuts will ultimately reduce the deficit by increasing economic growth. But the firm makes clear that its projections are just for the upcoming year. The impact of electoral outcomes on our longer-term fiscal health is murkier, they say.