With the partisan divide hardening in the run-up to November 5th, the presidential race was revived with the withdrawal of President Joe Biden at the end of July. In just a few weeks, Vice President Kamala Harris has breathed new energy into the Democratic campaign. National polls now give her a slight advantage, and her lag in the swing states[1] has narrowed considerably. And while Harris succeeded in her first televised debate on September 10th, upsetting Former President Donald Trump on numerous occasions and confining him to a defensive posture, the race remains extremely tight: With just a few weeks to go before the election, nothing seems decided yet.
The stakes of this election are crucial, first and foremost for the future of American democracy, but also in terms of geopolitics and climate change. During the four years of his presidency, Trump has shaken up national institutions and destabilized multilateral ones. The 2021 assault on the Capitol reminds us that the stakes in the American elections are far from being purely economic. His re-election would also mean more policies aimed at dismantling the federal government, deregulating industry and supporting fossil fuels. On the contrary, a Democratic victory would offer continuity in both political and climate domains.
In economic terms, the two candidates' programs will also set the United States, and with it the rest of the world, on very different trajectories.
When it comes to trade, Trump's rhetoric remains resolutely protectionist. He promises to raise tariffs on China by 60% and on other countries by 10% or even 20%. The Republican candidate also wants to make permanent the tax cuts passed in 2017 on his initiative -- they are set to expire at the end of 2025 -- and reduce the corporate tax rate[2]. He also wants to put a stop to immigration and says he wants to deport 11 million illegal migrants. He is not fond of Fed Chairman Powell and believes that the President should, if not control, at least be able to influence monetary policy decisions. Finally, in terms of industrial and climate policy, he wants to repeal the Biden-designed IRA[3] and promote the development of the oil industry ("Drill, Baby, Drill !" [4]). In budgetary terms, these measures are presented as self-financed: To the $3 trillion in revenue expected over ten years from the increase in customs duties, $1 trillion would be added in savings linked to the end of the IRA subsidy program, which would cover the $4 trillion of tax revenue losses due to tax cuts. This program would take more than a point off growth in 2025, and lead to a significant rise in inflation, which would particularly affect less well-off households, who are more sensitive to a rise in the price of imported goods[5]. It would also significantly worsen the budget balance over the next decade: Federal government debt would reach 132% of GDP in 2034, compared with 122% in the CBO reference scenario published in June 2024[6]. Of course, a trade war would also have repercussions for the global economy. In particular, it could push the Eurozone very close to recession...
Harris' program, on the other hand, is a continuation of Biden's and includes most of the measures proposed in his 2025 budget proposal[7]. It's a fairly classic social-democratic program, although Harris places even more emphasis than Biden on measures to support the middle class. Among other things, the candidate promises to lower healthcare costs, increase tax credits for the most disadvantaged and raise family allowances to lift “millions of children” out of poverty. To encourage access to home ownership, she suggests introducing a $25,000 tax credit for first-time buyers, a measure that could prove unnecessarily costly for the Budget in a context where the housing supply is already insufficient. On the climate front, the candidate remains rather evasive, indicating that she wants to pursue the development of an economy based on clean energies without, however, banning fracking. It has to be said that Pennsylvania, one of the "swing states" key to the election, is a major producer of shale gas, notably through hydraulic fracturing!
All included, public spending is expected to increase by around $3 trillion over the next decade[8]. This cost would be financed by raising taxes on the wealthiest and increasing the corporate tax rate from 21% to 28%. In addition to the $5 trillion in additional tax revenue expected over ten years, the project is projected to also generate $1 trillion in savings, thanks in particular to lower drug prices. The trajectory of public debt would thus become significantly more favourable than with unchanged policy, since federal government debt would stabilize at around 110% of GDP. However, this result seems optimistic: like Biden, Harris wants to extend the tax cuts that expire at the end of 2025 only for households earning less than $400,000 a year. This measure would cost the Budget $2.8 trillion over the next decade, a cost which the Democrats failed to specify how they intended to finance... More likely, therefore, public debt will remain on its current trajectory, gradually rising to just over 120% by 2034. The effect of this program would be to stimulate activity, notably through redistribution in favour of the least wealthy Americans, whose propensity to spend is higher than that of households at the top end of the scale.
These two programs are, of course, only election promises, and their implementation will depend not only on the candidate elected, but also on the colour of Congress. Without a majority in Congress, the gap between declarations and achievements is likely to be considerable. For the markets, however, two scenarios could have "disruptive" effects. In the first one, Trump would win the election, gain a majority in Congress and implement his most extreme promises. In the second, Harris would win by a narrow margin and would not have a majority in Congress. The election results would be contested by Trump's most fervent supporters and a period of social instability, coupled with government paralysis, would ensue.
It should be stressed that these scenarios would lead to very different monetary policies. In the first case, the central bank would be unable to ignore rising inflation and labour market tensions linked to Trump's migration policy. We believe it would have no choice but to raise rates despite a slowdown in activity. In the second case, with the economy durably depressed, we expect the central bank would lower rates instead... all the more rapidly as market liquidity would risk freezing up. While the probability of these "unfavourable" scenarios seems relatively low (around 20%), it would be dangerous for investors to ignore them completely...
[1] The "swing states" are states where neither of the two major American parties consistently wins. They swing one way or the other, depending on the election.
[2] D. Trump has just specified that the 15% rate may only apply to companies producing on American soil.
[3] The Inflation Reduction Act is designed to relocate strategic industries for the ecological transition to the United States.
[4] Formula to encourage those who drill oil wells
[5] A. Clausing and Mary E. Lovely (2024), "Why Trump's tariff proposals would harm working Americans", Policy Brief, PIIE.
[6] CBO : Congressional Budget Office. It should be noted that D. Trump's proposal in early September to create a sovereign wealth fund fed by revenues expected from tariff increases and " other smart things " in order to invest in infrastructure and defence projects, among others, would further worsen the trajectory of public debt.
[7] K. Harris has, however, toned down the tax hike component. She proposes, for example, to raise the tax rate on long-term capital gains to 28% for households with an annual income in excess of $1 million (compared with the 39.6% rate proposed by J. Biden). She also proposes a plan to support the creation of small businesses (administrative simplification but also an increase in the amount of deductible expenses from $5,000 to $50,000).
[8] President's Budget, summarized by the Committee for a Responsible Federal Budget
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