During elections, there is a lot of uncertainty. The not-knowing of which candidate will win, as well as how and when their policies will be implemented can be a big stressor for businesses. To them, a new appointment of a new leader could mean the start of new tax rules and government regulations and policies that could bring forth changes to the way a country is being run.
Its Adverse Effects
That uncertainty could explain why several key readings of the economy’s current condition have been surprisingly weak. Let’s analyse this step by step; firstly, although government spending increases in an average election year partially due to the funding for campaigns, it tends to fuel inflation rather than spur growth, suggesting that the extra public expenditure ahead of polls had been largely wasteful.
A possible explanation for this phenomenon is that as part of their re-election efforts, incumbents can manipulate economic policy instruments. Among other things, they raise public spending and run budget deficits (a budget deficit is an indicator of financial health in which expenditures exceed revenue) to increase overall demand and create job opportunities (even on a temporary basis), in order to make it appear as if the economy is better than it is—and boost their election prospects.
But the pre-election excess can be followed by a post-election hangover. Governments often have to go on an austerity plan to offset their free-spending pre-election policies. This politically generated boom-bust cycle (a process whereby economic expansion and contraction occurs persistently) can hurt long-term economic growth and stability as in the aftermath, to rebuild the buffers they depleted, governments have to cut investment spending and raise some taxes. This form of post-election fiscal retrenchment in government investments can seriously delay economic growth. Productive government investments are important drivers of economic growth and must therefore be stable. For example, an austerity program that leaves a well-designed road construction project half done after an election is not only wasteful but also impedes economic activity. Besides that, by depleting their fiscal buffers during election years, countries with low income further increase the vulnerability of their economies to adverse developments and limit their ability to deal with external shocks, such as a sudden change in commodity prices.
A consequence of inflation during such times would be how spending, in general, would be restrained, although it is expected to pick up. This occurs as the public awaits the results of the elections and thus, put a halt to spending. Moreover, what we’ve seen on newspapers, when talking a lot about uncertainty, is that the stock markets are much more volatile. Stock prices are jumping up and down on a daily basis and investors definitely take notice, leading to uneasiness and a lack of confidence. Right before we know it, investments drop and unemployment rises as businesses become more cautious, and more wary as they see uncertainty going up. Even the strong job market becomes a suspect – perhaps businesses would rather hire workers than spend big money on equipment and factories amid a fragile recovery. For now, many companies are simply sitting tight and when they are reluctant to invest, broader economic growth would be inhibited.
It Can’t Be That Bad
While elections may hurt the economy – be it pre-elections, during the campaigning, and/or post-elections, one thing most of us can agree on is the fact that the way countries are governed will be continuously changing. Even if existing/new rulers may not bring about drastic political, social, and economic changes, change will still take place, without a doubt. This allows for countries to explore new possibilities and ideas to move forward.
Isolating the election’s impact on the economy is difficult. It’s just one in a series of speed bumps that have threatened to throw the economic recovery off course for many countries. But ultimately, the political business cycles are inevitable.
“We are a world in transition with many who are justifiably looking for a change in course. Whether that move will take us to higher, safer ground or instead thrust us further into the path of the political storm is unknown,” – Diane Swonk, founder of DS Economics.
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