3 Potential Outcomes for the Midterms—and What Each Scenario Would Mean

The Nov. 8 midterm election will decide whether Democrats retain control of both chambers of Congress, or Republicans win power in either—or both. Much is riding on that outcome, from tax policy to defense spending to the likelihood of a debt-ceiling fight. And much is at stake for the markets, as well.

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If the GOP takes either the House of Representatives or the Senate, expect no new taxes and no inflationary fiscal spending over the next two years. If Democrats retain control, the focus will be on passing social spending legislation and, potentially, raising taxes to pay for it. A divided Washington could find room for compromise on the Farm Bill and industrial policy, but the need to raise the debt ceiling could spark a political brawl.

Here is a look at what to expect next year if either Republicans or Democrats win both chambers, or share control of the 118th Congress.

CONGRESS IS DIVIDED

• More gridlock and brinkmanship; less legislation passed
• Heightened risk of a government shutdown if two parties can’t agree on a new budget in 2023
• Fight over lifting the debt ceiling sometime next summer or fall; expect financial-market turmoil if a drawn-out process pushes the country close to defaulting on its debts
• Little chance of fiscal relief in a recession
• Bipartisan cooperation to pass a Farm Bill next year, with Democrats pushing for more money for conservation and nutrition programs and Republicans supporting rural interests, probably including crop insurance
• Potential for bipartisan cooperation to bolster U.S. industrial policy and promote “near-shoring” to remain competitive against China
• Potential for bipartisan deal on extending the child tax credit in exchange for a research-and-development tax-credit fix

REPUBLICANS WIN BOTH CHAMBERS

• Increased spending on defense
• Greater support for the legacy energy sector and oil and gas companies

• Focus on passing “messaging bills” on GOP priorities such as tax cuts or border security that President Biden would probably veto, but which would help distill the Republican agenda ahead of 2024
• Probably no chance of fiscal relief in the event of a recession
• Passage of a Farm Bill reflecting Republican priorities, including potential cuts to the nutrition and conservation programs and more support for rural interests
• More executive actions from the Biden White House, which will otherwise be hamstrung on advancing its agenda
• More focus on investigations and oversight from a Republican House
• More blocking of presidential Cabinet and judicial appointments from a Republican Senate

DEMOCRATS KEEP CONTROL OF BOTH CHAMBERS

• More fiscal spending likely, though it would have to be paid for
• Targeted fiscal relief in the event of a recession, potentially through expanded unemployment aid or similar measures
• Renewed effort to pass scrapped pieces of the Build Back Better agenda through reconciliation, including extending the child tax credit or allocating money for eldercare
• Potential revisiting of the tax code to raise revenue to pay for new spending, including steps to raise tax rates on wealthier households, increase capital gains taxes or push for the global minimum tax
• Greater potential for more monetary aid to Ukraine
• Potential push for stricter regulation surrounding cryptocurrency, Big Tech

Write to Megan Cassella at megan.cassella@dowjones.com