What the Midterms Mean for FY2027 Federal Spending and Beyond

FY2027 is underway, but most of the federal budget is still undecided. Now, after the November 3 midterms, Democrats will control both the House and Senate when the new Congress convenes in January. This will inevitably shift who sets the terms for federal spending over the next two years.

In this blog, we cover where FY2027 funding stands today, how spending priorities could change in FY2027 and beyond, and what contractors can do to prepare.

Why Does a New Congress Change the Budget Picture?

The President proposes a budget, but Congress writes the 12 annual spending bills, and the President signs or vetoes them. With Republicans running both branches right now, the White House request set the agenda. Starting in January, Democrats will write the bills, but President Trump keeps his veto, and Democrats will likely fall well short of the two-thirds majority needed to override it.

In other words, neither side can write FY2027 on its own terms. Every major funding decision now requires a deal. What this means is the most likely outcome is a compromise. Defense keeps growing, but less than the White House wants and with potentially new priorities, proposed cuts to civilian agencies are softened or reversed, and all of it takes longer than usual.

What Are the Current Bipartisan Disagreements?

The core disagreement which isn’t necessarily groundbreaking news is defense versus domestic spending. The White House FY2027 Budget plan included $1.5 trillion for defense, a 42% increase, paired with a 10% cut to nondefense programs. About $350 billion of that defense total was meant to pass through a party-line reconciliation bill (a fast-track legislative tool used in Congress to pass budget-related priorities). Proposed reconciliation funding would go mainly to the defense industrial base and next-generation technology, particularly drones and AI infrastructure.

The Democratic priorities are housing affordability and healthcare, protecting domestic programs, and limiting funding for the Iran war. Senate Democrats were already resisting the $1.5 trillion defense proposal before the election.

Where Does FY2027 Funding Stand Today?

The government is currently operating under a continuing resolution (CR), which funds all 12 appropriations bills through December 11, 2026, according to the Congressional Research Service. If Congress doesn't pass full-year bills or another CR by then, a funding gap begins December 12.

The House has moved several FY2027 bills, but the Senate Appropriations Committee hasn't marked up its versions of bills such as Agriculture and Homeland Security. On the defense side, neither the House Military Construction/VA bill nor the House defense bill had cleared the Senate committee.

However, the Senate voted on November 9^th to advance a bipartisan energy and infrastructure permitting reform package (called the Bipartisan American Affordability and Jobs Act).

What Could Happen Before January 2027?

Right now, Republicans keep control of both chambers until the new Congress is seated. The main things to watch during this time is another Continuing Resolution (CR), and the defense budget. We will most likely see another CR as a stopgap to avoid a lapse in funding, and both chambers' budget resolutions include $60 billion for defense, far below the $350 billion requested.

How Could Spending Shift in FY2027 and Beyond?

None of the following is settled of course, but there will be a few trends to keep an eye on starting in January 2027 when Democrats take control of Congress. We’ll outline them in the table below and go into each one further.

Defense Still a Big Focus, but Priorities Expected to Shift

The House defense bill's roughly $1.072 trillion total discretionary spending tracks with the FY2027 Budget request. If reconciliation falls short, the Department of Defense (DoD) has said it would work with Congress to move those priorities into regular appropriations, which would require bipartisan agreement.

What’s important to note here is that defense investments aren’t necessarily going to drop dramatically when Democrats take over in Congress. The biggest changes we may see are with how Congress prioritizes defense spending/how closely it will look at certain programs, and the gap between civilian and defense budgets.

The war in Iran was also a hot topic during the midterm elections, so we expect to see some further scrutiny from the new Congress on how the administration plans to address the conflict and what the spending will look like.

Healthcare Predicted to Become a Higher Priority

Healthcare affordability is expected to top the Democratic agenda. Since the FY2027 budget proposed a reduction in spending for healthcare, Democrats are likely to push to restore at least part of the enhanced Affordable Care Act premium subsidies, which expired at the end of 2025, and to loosen the Medicaid work requirements states must implement starting in 2027.

During this time, if you support federal health agencies, you should keep an eye on Department of Health and Human Services (HHS) appropriations and funding, along with other related agency funding such as National Institute of Health (NIH).

Housing and Infrastructure Priorities to Shift

The FY2027 budget request proposed a 16% cut to the U.S. Department of Housing and Urban Development’s (HUD) net discretionary funding and eliminated the Community Development Block Grant (CDBG) and HOME programs, among other cuts. With Democrats in control, deep HUD cuts look less likely.

The midterm election had a particular focus on lowering housing costs, and expanding affordable housing access. The new Congress members will most likely favor support for housing assistance.

On infrastructure, the Infrastructure Investment and Jobs Act's (IIJA) surface transportation authorization also expires December 11. The current extension doesn't restore FY2027 IIJA advance appropriations. The House Transportation and Infrastructure Committee approved the bipartisan BUILD America 250 Act, about $580 billion for FY2027 through FY2031, by a 62-2 vote, but the Senate hasn't produced text yet. That lopsided committee vote suggests infrastructure is one area where a divided government could still reach a deal.

Scientific Research Funding to Possibly Increase

The administration requested a 55% cut to the National Science Foundation (NSF) and a 23% cut to NASA in their official budget request. The House bill was less severe, funding NSF at $7 billion (a 20% cut) and keeping NASA flat at $24.4 billion.

Democrats are expected to write more specific spending directions into bills and investigate funds the administration has withheld. However, experts caution that changes to how grants are reviewed and awarded are mostly beyond Congress's power to undo. Scientific research isn’t necessarily bipartisan issue, but we do anticipate seeing some change here.

For research-focused contractors, this could point to steadier funding levels in research programs and funding for emerging technologies, AI, etc, but award timing may stay hard to predict.

How Should Contractors Prepare for the Shift in Spending?

The next several months will likely bring delays, not dramatic overnight shifts, but here are some things to consider:

• Plan for a CR into spring: A longer Continuing Resolution may slow new awards and program starts until the budget can be agreed upon.
• Get ready for a compressed buying window: If full-year bills pass in the spring, agencies will have only a few months to obligate funds before September 30.
• Look at both defense and civilian markets. Defense remains strong, and civilian agencies are likely to fare better than the original request suggested. Democratic Congress is likely to resist deep cuts at agencies such as HHS, HUD, NSF, and NASA.
• Track where defense priorities land: Munitions, drones, AI infrastructure, and the industrial base were central to the request, whether funded through reconciliation or regular appropriations.

Are You Prepared for the Spending Shifts?

Congress has until December 11 to act, and the bigger FY2027 decisions will likely wait for the new majorities in 2027. When funding does arrive, agencies tend to rely on pre-existing contract vehicles that let them buy quickly, so now is a good time to make sure your contract is current, especially if you are part of the GSA Multiple Award Schedule (MAS) Program. The federal government has slowly been condensing contract vehicles and directing agencies to buy from programs such as MAS. So now is the time to ramp up your contract, or consider getting one.

While we may not see dramatic changes in spending right now, we are always looking ahead to the next Fiscal Year. The end of FY2027 and FY2028 is really when we’re going to start feeling the impacts of a new wave in Congress. Now is the time to think ahead and prepare.

Our consultants would be happy to help you review your GSA Schedule, prepare any needed modifications, and help you optimize your contract for the coming year. If you don’t currently have a government contract and are interesting in getting one, we can help with that too.