Factbox: Key political risks to watch

WASHINGTON (BestGrowthStock) – With U.S. congressional elections one day away, the actions of legislators and the Obama administration will be followed closely by investors.

Here are the main political risks to watch in the United States:

MIDTERM ELECTIONS

Polls show Republicans are likely to win control of the House of Representatives but probably fall short of taking the Senate, which is a recipe for political gridlock.

What to watch:

— The size of any Republican victory. Even if it wins the House, the opposition still needs 60 members in the Senate to be assured of passing bills. It is unlikely to get that. Republicans would actually need 67 votes in the Senate, plus a large majority in the House, to be able to fend off vetoes by President Barack Obama.

— Whether Obama will be able to work with the Republicans or will chose to fight them as they try to roll back his signature healthcare and Wall Street reforms.

— A better-than-expected performance by the Democrats on Tuesday could spook the U.S. stock market.

— The rise of the Tea Party. The conservative movement will pressure fellow Republicans to cut spending and reduce the budget deficit and could even challenge the independence of the Federal Reserve.

BUSH-ERA TAX CUTS

An early and crucial test of whether the two parties can work together will come in mid-November when Congress is likely to decide whether to extend tax cuts dating back to George W. Bush’s presidency. Letting the cuts expire would help plug a hole in the deficit but would be unpopular with most Americans and would hit company profits.

What to watch:

— A tax on company dividends for upper income groups that will shoot up to 40 percent from 15 percent now if lawmakers do not extend the cuts. Capital gains taxes would also rise to 20 from 15 percent.

— Obama wants tax cuts to expire for the richest 2 percent of the population — those earning more than $200,000 a year or couples who earn over $250,000 year.

BUDGET DEFICIT

The budget deficit was at a near-record $1.29 trillion in fiscal year 2010. The Republicans doing well in the election is seen as positive for spending reduction, as both parties will share the blame for tough cuts.

What to watch:

— Whether a bipartisan deficit-reduction commission can agree on meaningful measures when it issues its report in early December. Fourteen of the group’s 18 members are supposed to agree before a comprehensive report is issued but they might not reach consensus and end up giving less conclusive recommendations.

— Despite the hefty debt burden, the U.S. Treasury has had no difficulty so far in finding willing buyers of government bonds and interest rates remain very low. The concern is that buyers may one day lose faith in politicians’ willingness to put finances back on a sustainable path. They might refuse to cheaply finance U.S. spending and borrowing costs would spike. In an unlikely doomsday scenario, the United States would have so much difficulty attracting debt investors that it would be forced into taking stern measures to curb spending and raise taxes.

— In the end, implementation of the commission’s ideas by Congress in 2011 is everything and bipartisan cooperation will be needed. Republicans will push for sharp domestic spending cuts, but experts say that won’t be enough to close the gap.

— Austerity measures. While markets are keen on keeping the deficit under control, an austerity program that crimps consumer spending could hit company earnings or stunt economic growth.

Factbox: Key political risks to watch