Guotai Junan: It will be difficult for the U.S. fiscal deficit to expand after the general election.

Guotai Junan released a research report stating that based on historical experience, the fiscal policy in the first year after the US presidential election tends to tighten. If there is a standoff between the president and Congress, the tightening measures will be expanded. It is expected that the US deficit in 2025 will slightly decrease compared to 2024, mainly due to two factors: one is that some provisions of the Trump tax cut bill TCJA will expire, leading to a slight increase in tax revenue; and the other is the increased likelihood of a "divided Congress," which may constrain policies that expand fiscal spending. Key points from Guotai Junan are as follows: 1. After Harris officially became the Democratic presidential candidate, the election situation has become tense. The reason why there was a "honeymoon period" for Harris in the past month is mainly because Harris seized the opportunity when people did not know much about her, gaining support from middle-of-the-road voters who do not like either Biden or Trump. Whether this "dividend" can continue still requires further observation. 2. The main differences in policies between Trump and Harris come from tariffs and fiscal policies. Fiscal policy has higher bargaining costs behind it than tariff policy, making it more susceptible to the direct influence of the different combinations of the president's party and the majority party in Congress after the election. 3. Reflecting on fiscal changes in the US before and after each presidential election since 1964, the primary factor affecting US fiscal expansion or contraction is still the economic cycle. Different combinations of party presidents and the majority party in Congress will have a certain degree of impact on fiscal policies. Democratic presidents usually show more fluctuation in fiscal spending when in office or elected. Generally, the deficit rate in the year of the US election does not change significantly compared to the previous year, and the fiscal policy in the first year after the election tends to tighten. The fiscal tightening by a new Democratic president is usually more pronounced. Standoffs between the president and Congress do lead to greater fiscal tightening in the year of the election and the following year. Democratic presidents facing opposition from the majority party in Congress are more likely to see a decrease in the deficit rate due to significant cuts in fiscal spending. Republican presidents, regardless of their relationship with Congress, tend to reduce the deficit by increasing revenue. 4. In 2025, key concerns for US fiscal policy include how to handle the tax cuts under the TCJA and the impact and actual implementation of economic policies, such as expanding fiscal spending, if Harris takes office. Overall, the US deficit rate in 2025 may slightly decrease compared to 2024, mainly due to the increased likelihood of a divided Congress with both parties engaging in fiscal policy negotiations: on one hand, some tax cut provisions of the TCJA expiring will lead to a decrease in the deficit rate due to increased tax revenue; on the other hand, despite Harris's inclination towards expanding fiscal spending, actual implementation may be challenging, and significant spending expansions may face constraints. Risk warnings: Both parties' candidates may release negative information about each other before the election, affecting the election results; candidates may make hawkish remarks on China to win votes.