The 2022 Midterm Elections and Aerospace and Defense Spending

While votes are still being counted and the Senate race in Georgia will go to a run-off, it's not too early for some thoughts on what the midterms mean for aerospace and defense.

So while for some reason various states are still counting votes, the vast majority of the midterm races have been called. Overall, it was a very good night for the Democratic Party - they will maintain control of the Senate and may actually increase their majority (depending on the result of a run-off election in Georgia later this year). While around twenty House races are undecided, it looks likely that Republicans will win the House with an extremely narrow majority (220 GOP seats to 215 Democratic seats is roughly the expectation). As I discussed in my write-up just prior to the midterms, the composition of the House majority has clear implications for defense spending and the extremely narrow majority that is likely to be in place makes it difficult to see how Republican House leadership will navigate through must-pass legislation in the 118th Congress.

Back in August I offered some thoughts on the midterms, reviewing that this morning I think I was a bit more bearish on the Democrats’ chances, but not particularly far off.

“So overall I think it’s hard to see a scenario where Democrats do well in November. I expect them to lose the House and likely the Senate as well, though the range of outcomes in the Senate is a bit wider.”

Given that Democrats have the possibility of expanding their majority in the Senate to 51, my forecast definitely erred on the side of a Republican “red wave”. Right now, Democrats control 50 Senate seats with the run-off in Georgia pending. In historical context, this looks to be one of the best midterms for the party in the White House since the Roosevelt administration.

In the House, control of the chamber has not yet been finalized, but it is highly likely that Republicans will win a narrow majority. The only question is if the majority is 219 seats or closer to 225 - in either case, Republicans will only be able to lose a handful of votes on any controversial legislation if they want it to pass. It is likely that Kevin McCarthy will be the Speaker of the House, but he faces pressure from conservatives to adopt various reforms that will undercut the independence of the Speaker and make it more difficult for must-pass legislation negotiated with Democrats to pass. It is likely he will need to give way to their demands to get to 218 votes.

This sets up an interesting scenario for aerospace and defense spending. Optimistically, I think this makes it more likely that an omnibus is agreed to in December. Given the narrow margins in both chambers, there is likely little appetite among leadership for a shutdown showdown and a strong desire to clear the decks for the new Congress. Passing FY 2023 appropriations in December would be roughly in line with normal Congressional performance since 2000.

The tricky part will come in calendar year 2023. If FY 2023 appropriations are not passed before the 118th Congress convenes, it becomes really difficult to see an easy way to passage. Conservatives in the House will demand that McCarthy hold the line in ways that would make any compromise with the White House and Senate, a requirement for passage, almost impossible. A prolonged CR and/or a government shutdown would not be off the table.

It will be a similar story with the debt ceiling and FY 2024 appropriations. It will be extremely difficult to pass anything through the House if the Speaker’s job is held hostage - a death knell for “secret Congress” - the quiet, non-partisan legislating that has been getting done over the past half-decade somewhat under the radar. Further, it creates a lot of risk for the defense topline.

The key questions will be what sorts of compromise Congressional Republican leadership is willing and able to make with the White House and Congressional Democratic leadership. There will likely be significant demands for reductions in non-defense discretionary spending, limits on aid to Ukraine, and potentially even reforms to entitlements. Democrats will be loathe to accede to any of these proposals without accompanying concessions on the GOP side. This might be in the form of accepting higher taxes or matching reductions to defense spending. It will undoubtedly be a messy and volatile process given the narrow margins in both chambers, but the threats to defense spending (and space spending for agencies like NASA and NOAA) are very real. Interested parties should watch the negotiations around budget resolutions and the NDAA in early 2023 to see what sort of positions are being taken by various sections of both parties and plan accordingly.