Democrats won majorities in both the Senate and the House in the US midterm elections, achieving a 'blue wave', but forecasts say it will be hard for the broad direction of US policy to change. Control of Congress has passed to the Democrats, but institutional constraints such as the presidential veto make it difficult for them to push new policies. Next year, negotiations over the US government's debt ceiling and the expiration of major tax breaks are expected to act as key variables for financial markets.
In a report on the 10th, Ha Geon-hyeong and Moon Seo-hyeon, researchers at Shinhan Investment Corp., said, "The Democrats' influence in Congress is closer to refusing to extend existing laws and checking the budget and confirmations than to enacting new legislation."
In these midterms, the Democrats secured at least 54 Senate seats and 253 House seats as of November 6. From January 2027, a system of a Republican administration and a Democratic Congress will begin. However, passing an ordinary bill in the US Senate requires 60 seats, and re-passing a bill the president has vetoed requires 67 Senate seats and 290 House seats. The Democrats' seats alone cannot meet that.
Accordingly, the Democrats are expected to check the Trump administration through the budget and confirmation of government appointees rather than pursue new policies. However, tariffs under Section 301 of the Trade Act and Section 232 of the Trade Expansion Act, which the administration can decide on its own, are likely to be maintained as before, the analysis said.
Financial markets took the election result as a factor lowering the risk of a growing US fiscal burden. The yield on the 10-year US Treasury fell to the 4.8% range after the election, the lowest since September 10. President Trump had pledged to pay $5,000 per adult if Republicans won, but the Democrats' takeover of Congress made that less likely, easing concerns about fiscal deterioration.
Next year, negotiations over the US government's debt ceiling are expected to emerge as a new variable. The debt ceiling is the maximum amount the US government can borrow. When the limit is reached, the government will find it hard to borrow more until Congress raises it.
Shinhan Investment expects the US to hit the debt ceiling between the end of the first quarter and the start of the second quarter of 2027. Among debt ceiling negotiation scenarios, the researchers put the probability of raising the ceiling within the year at 30% and of reaching a deal before hitting the limit at 10%. They put the probability of a standoff lasting until talks collapse and the government exhausts its cash on hand (the X-Date) at 60%, the highest.
If debt ceiling negotiations drag on, money may be temporarily released into financial markets. The US Treasury keeps the Treasury General Account (TGA), an account at the Federal Reserve (Fed) where government funds are held. When the government collects taxes or issues Treasury bonds, money builds up in this account, and when the government makes various payments, the balance falls.
When the debt ceiling is reached, the US government finds it harder to borrow more, so it draws down the TGA balance it had built up and uses it for government spending. The money the government spends flows to the private sector, including companies and households. That creates an effect of money being released into financial markets.
Shinhan Investment forecast that if debt ceiling negotiations last until the X-Date, the TGA balance will fall by $850 billion over about six months. However, the situation changes after a deal is reached. When the US government issues Treasury bonds again to replenish the TGA balance, the money previously released into the market returns to the government account and liquidity shrinks. The researchers expect the liquidity supplied to be withdrawn within three to four months after the debt ceiling is raised.
The expiration of existing tax breaks is another variable that will affect corporate investment. The researchers explained, "If a revenue gap pulls forward the fiscal clock, tax deadlines pull forward the investment clock." This means companies that want to use tax breaks before they end may rush investment, so new investment could fall afterward.
A representative case is the semiconductor investment tax credit (48D), whose credit rate was raised from 25% to 35%, but whose construction start deadline is December 31 this year. The analysis is that after companies rush to start construction by year-end to get the tax benefit, a gap may appear in which new investment declines. Renewable energy is also expected to see investment shrink after its tax breaks end.
At the end of 2028, major tax-cut provisions such as the deduction for tips and overtime income and the deduction for auto loan interest will also expire. While Republicans push to extend the tax cuts, Democrats are expected to make restoring the Obamacare (ACA) premium tax credit a condition for negotiation. If the two sides agree, the fiscal deficit could widen by $90 billion a year.