Policy Outlook Remains Uncertain

BMI View: Presidential, congressional and several gubernatorial elections will be held in November 2012. Until the next federal government is in place in January, we expect little compromise on major issues in 2012, with most big decisions postponed until the new Congress (and potentially new President) takes office in January 2013. This will result in an extremely uncertain outlook for economic policy.

Until the next federal government is in place in January, we expect little compromise on major issues in 2012, with most big decisions postponed until the new Congress (and potentially new President) takes office in January 2013. This will result in an extremely uncertain outlook for economic policy. The 'fiscal cliff' of tax hikes and expenditure cuts due to come into effect in January 2013 is the biggest policy risk in the months ahead, though we believe that current policy will be at least temporarily extended following the November elections. Even monetary policy could get politicised, given the antagonistic comments made about the role of the Federal Reserve by some candidates during the Republican Party presidential primary campaign, and the rise of the 'Tea Party' movement.

Our core view remains that the Republicans are likely to win another majority in the House of Representatives, and at least bring themselves level with the Democrats in the Senate (50 seats to 50). Former Massachusetts governor Mitt Romney will be officially appointed the Republican nominee at the party convention in Florida in August. President Barack Obama's low levels of public approval suggest that he will have a difficult re-election campaign. However, he maintains the advantage of incumbency, and most tracking polls show Obama with a fairly consistent lead over Romney in terms of voting intentions. Still, it is early days yet, and if the economy worsens amid weakening global growth, Romney's chances would be greatly enhanced.

So as it stands, the policy outlook in the quarters ahead is still very uncertain. Here, we look at some potential scenarios for economic policy depending on which candidate wins the presidency, as well as some areas of common ground between the two major parties.

Romney Wins

A Romney victory in November, alongside our core congressional election scenario of the Republicans losing some ground in the House of Representatives but gaining seats in the Senate (leaving the Democrats barely in charge), would probably be the best-case scenario for reducing policy paralysis. Romney would be in a position to effect change alongside a Republican house and a less-partisan Democratic Senate. In this scenario, the White House and Congress would probably work together on extending existing tax cuts. Romney's stated policy is to extend the 2001/2003 tax cuts, eliminate taxation on capital gains, dividends and interest for taxpayers earning under US$200,000, eliminate the estate tax entirely (it has a current top rate of 35%), and lower the top marginal corporate tax rate from 35% to 25%. However, we believe that he will fall short of repealing key pieces of legislation passed under Obama, including the health care reforms that were affirmed as legal by the Supreme Court in June 2012.

Obama Wins

Were Obama to win a second term, the major advantage that he would have in terms of policy is that he cannot run for a third term. This means that he would be in a better position to push forward unpopular policy that would otherwise endanger any further re-election campaign. The biggest disadvantage that Obama faces is that Congress is likely to become increasingly antagonistic, because although the Republicans are likely to lose ground in the House, the Democrats are likely to lose ground in the Senate.The major contrast with Romney on domestic policy is that taxes would be likely to increase under Obama rather than decrease. Obama has a strong hand to play on tax policy, due to the scheduled expiry of the 2001/2003 tax cuts at the end of 2012. While the Republicans want to extend the tax cuts permanently, it is likely if Obama is re-elected that they would have to accept a compromise whereby tax rates for most American households remain at low levels, while there is an increase for higher-income earners.

Limited Common Ground

There are one or two aspects of policy that have reasonable bipartisan support. We would expect at least a short-term extension of tax cuts for households making under US$250,000 per year. Both parties seem genuine about their desire to overhaul the tax code and implement a plan to reduce long-term entitlement costs. We believe that the tax code revision would at least be acceptable to a Republican Congress, and could achieve the dual aim of improving the 'fairness' of the tax system, while increasing revenue collection.

Political Overview
Source: BMI
System of Government Constitution-based Federal Republic, Universal Suffrage. Executive branch headed by president. Bicameral legislature divided between House of Representatives (435 seats) and Senate (100 seats).
Head of State President Barack Obama since 20 January 2009.
Head of Government President Barack Obama since 20 January 2009.
Last Election Presidential and Congressional elections, 2 November 2010.
Composition Of Current Government Democratic Party holds the Presidency and the Senate; Republican Party holds the House of Representatives.
Key Figures Vice President - Joseph Biden. Secretary of State - Hillary Clinton. Secretary of the Treasury - Timothy Geithner. Speaker of the House of Representatives - John Boehner. Senate Majority Leader - Harry Reid. Chairman of the Board of Governors of the Federal Reserve - Ben Bernanke.
Other Key Posts Secretary of Defense - Leon Panetta. Secretary of Commerce - John Bryson. Secretary of Agriculture - Tom Vilsack. Secretary of Homeland Security - Janet Napolitano. UN Ambassador - Susan Rice. US Trade Representative - Ron Kirk.
Main Political Parties (number of seats in parliament) House of Representatives - Democratic Party (190 seats), Republican Party (242 seats). Senate - Democratic Party (51 seats), Republican Party (47 seats), Independent (2 seats).
Next Election House of Representatives - November 2012
Senate - November 2012
Presidency - November 2012
Ongoing Disputes Various maritime territorial disputes, including 1990 Maritime Boundary Agreement in the Bering Sea which still awaits Russian ratification, and failure to reach an agreement with the Bahamas on a maritime boundary. Pacific island dependencies under the US are claimed by other nations, including Wake Island (by the Marshall Islands) and American Samoa's Swains Island (by Tokelau).
Key Relations/ Treaties Is a member of several major international organisations, including the United Nations Security Council (as a permanent member), NATO, and the WTO.
BMI Short-Term Political Risk Rating 83.3
BMI Structural Political Risk Rating 87.6
This article is tagged to:
Sector: Country Risk
Geography: United States

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