Goldman Sachs Thinks Republicans Will Run Up the Deficit

President Barack Obama, flanked by Vice President Joe Biden (L) and House Speaker John Boehner (R-OH), delivers his State of the Union address Photograph by Saul Loeb/Getty Images

Last week, I noted that despite all the focus on the proposed cuts in the House Republicans’ new budget, there were also hundreds of billions of dollars they were looking to uncut—specifically, the $500 billion automatic reduction in military spending outlined in last year’s Budget Control Act and set to take effect on Jan. 1.

Goldman Sachs evidently agrees. In a new research note about the implications of the 2012 elections, the company cites the likelihood that Republicans would roll back the defense “sequester”—that’s Washington speak for the automatic cuts—as a reason why Republican control of the White House and Congress might actually lead to larger deficits, despite all the Sturm und Drang from conservatives about the need for austerity. The other reason the deficit might grow under Republican control is that they’d probably extend, and possibly increase, the Bush tax cuts.

The scenario if Democrats win unified control of Washington isn’t too rosy in Goldman’s view, either, primarily because of the possibility that they might implement some or all of the $160 billion in additional stimulus that President Obama proposed in his latest budget. This strikes me as unlikely. The word “stimulus” is practically verboten in Washington, and Democratic legislators won’t soon forget the drubbing they took in 2010 for “out-of-control government spending” and other things Republicans charged them with. But it’s certainly possible they’ll do something.

So what does Goldman Sachs see as the optimal political outcome this fall? More of the same: “A status quo outcome that preserves a divided government would imply a lower likelihood of a temporary lapse, but could lead to somewhat greater fiscal restraint in 2013.”

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