Goldman Sachs previews the U.S. midterm elections: Democrats are likely to win the House, with fiscal policy, tariffs, and AI regulation becoming key battlegrounds.

Goldman Sachs released a U.S. economic analysis report on November 1, noting that the core focus of the November 3 midterm elections is as follows: prediction markets show the probability of Democrats winning a House majority exceeds 90%, while control of the Senate remains uncertain; if Democrats take the House, fiscal deadlines such as the December 11 expiration of spending authorization and the 2027 debt ceiling will become the main legislative battlegrounds. The report also notes that the probability of major fiscal policy changes over the next two years is not high, but under a Democratic victory scenario spending could increase slightly; on tariffs, Democrats would only modestly roll back some tariffs, which is expected to be insufficient to offset the impact of new tariffs imposed by Trump after the midterms, and the overall U.S. tariff level could still rise; the data center issue may cool after the election, while AI regulation and state-level restrictions remain worth watching. I. Democrats Have a High Probability of Winning the House; the Senate Is More Uncertain The report says polls and primary voting show that since the 2024 election, national sentiment has swung toward Democrats by about 10 to 11 percentage points. In national generic ballot polls, Democrats currently lead by about 9 percentage points; in 2024 Republicans won the House popular vote by 2.6 percentage points, implying a swing of more than 11 percentage points. Voter enthusiasm indicators and primary participation rates also point to a similar magnitude of Democratic advantage. In the House, Democrats need a net gain of only 3 seats to obtain a majority. Prediction markets currently suggest Democrats are on track for a net gain of 21 seats, reaching 236 total seats next year, similar to the size of the Democratic majority after the 2018 election and wider than the slim advantage of slightly above 220 seats held by the governing party since 2021. The Senate race is closer. The report says Democrats lead in some Republican-held seats, but most are within the margin of error; in the seats Democrats need to defend, their candidates also lead in polls, but two of them are within the margin of error. The report holds that if Democrats win the House, the importance of the Senate outcome relatively declines, because passing legislation in the Senate usually requires bipartisan support, and President Trump can still veto bills sent by Congress. II. Fiscal Deadlines Become the Focus; Spending May Increase Slightly The report holds that under a scenario in which Democrats win the House, fiscal deadlines will be the main focus of legislative action. Spending authorization needs to be extended and the debt ceiling needs to be raised, which may force both sides to compromise. Democrats may use these deadlines to push agendas such as the Iran war, tariff reductions, reversing spending cuts, and expanding health benefits. However, Goldman Sachs does not believe Congress will address these deadlines before the end of the year, although Republicans may try. Specifically, the next relevant deadline is December 11, when spending authorization expires. The report says that given policy differences and the gap between the two sides' proposed spending levels, Congress is more likely to push the deadline to February or March 2027. The debt ceiling may be reached in the first quarter of 2027, and the U.S. Treasury is expected to respond by drawing down its balance at the Federal Reserve and using extraordinary measures, but Congress may need to raise the debt ceiling before October 2027. The report says Democrats may use government shutdown risks or mandatory events such as the debt ceiling to seek policy concessions. Jeffries, who may become House Speaker, has said he expects to move quickly to expand health insurance subsidies, cut some tariffs, and push for a vote against the Iran war. House Democrats also set up a working group this year on affordability issues, covering food, energy costs, housing, health care, and caregiving, which may be a core theme next year. On the fiscal policy impact, Goldman Sachs does not believe there will be major changes over the next two years, but under a Democratic victory scenario spending may increase slightly. Democrats propose reversing the spending cuts in last year's fiscal package, which is expected to increase 2027 spending by about 0.25% of GDP. If an agreement is reached on discretionary spending and/or expanding health insurance subsidies, there could be a slight increase on top of that. III. Tariffs: Partial Rollbacks Difficult to Offset New Increases The report says Democratic leaders have stated that if they win a majority they will try to reverse some Trump administration tariffs. Provisions to cut tariffs on specific countries or products may enter fiscal deadline negotiations and could even pass as standalone measures, with the most likely focus being reducing tariffs on imports from Canada. But the report expects that after the midterms Trump will announce the results of the Section 301 investigation into industrial overcapacity, and the combined measures will restore tariffs on individual trading partners to roughly their levels before the Supreme Court ruling. The report expects that the new tariff increases Trump announces after the midterms will have an impact exceeding Democrats' partial rollbacks, potentially raising the U.S. effective tariff rate by a net slightly less than 2 percentage points. IV. Data Center Issue Expected to Cool; AI Regulation in Focus The report says data centers became a theme in some campaigns this year, but attention is expected to decline after the election because they rank low among voters' priorities. Congress may limit tax incentives for data centers, but regardless of the election outcome, a nationwide moratorium on data center construction looks unlikely. The report expects Congress's focus to shift to AI regulation, with a possible compromise including basic federal oversight and self-testing, but strict restrictive regulation is unlikely to be introduced. At the state level, further action is still possible at the state and local level after the midterms. Some Democratic gubernatorial candidates have proposed stricter restrictions than their Republican opponents, including statewide moratoriums, environmental legislation, and limits on tax incentives. Potential Democratic trifectas in Arizona, Pennsylvania, and Nevada could drive new AI-related laws and bring more AI regulation modeled on existing rules in California and New York. At the federal level, the report holds that Democrats winning one or both chambers is unlikely to produce comprehensive new regulation, and any legislation would need bipartisan support. A bipartisan AI agreement may center on self-testing and self-regulation, with a moderate burden on AI companies. By contrast, stricter proposals such as independent external assessments and mandatory government pre-review of models are unlikely to win bipartisan support. If Democrats win either chamber, the report expects them to launch investigations into large technology companies, examining AI development, safety practices, and data collection. On data centers, Democrats may propose excluding them from some tax incentives and push for data-center-specific taxes, but Republicans may block stricter regulation.