In my January column in Company Director, titled “The election effect” (and available here), I pointed out that economic research shows that in the year leading up to an election, business investment is (on average) about 5% lower than it otherwise would be. As business investment accounts for about 15% of GDP, a typical election year can slow economic growth by 0.5% or more. Investment declines by more the closer are the polls, because there is then more uncertainty about which party will win and what policies will apply. In Australia’s Federal election, the polls were close throughout the last 9 months! However, the impact of that pre-election uncertainty on economic growth could be dwarfed by the impact of post-election uncertainties.
Consider the impacts in both the very short-term (until we find out who will govern us) and the medium-term (between then an the next election). In the very short-term, spending decisions will be put on hold if they could be significantly affected by policy differences between the major parties. Examples of such decisions include investments by small businesses, investments in housing and consumption by those nearing retirement, as the pay-offs to these decisions depend on which major party will form government and therefore which policies on company tax cuts, negative gearing and superannuation will apply.
However, while that uncertainty is unpleasant, it is likely to be resolved within days. The much bigger worry is the impact of ongoing uncertainty over the next three years if we end up with a minority government. In that case, economic growth will suffer because at least three key uncertainties will persist:
- How long the government will last (minor parties and independents can switch allegiances at any time);
- How long the Prime Minister will last (given the reported leadership tensions within both major parties); and
- The government’s ability to get its policy measures through Parliament.
Economic research around the world has shown that such persistent political uncertainty and/or instability can have considerable negative impacts on economic growth.
Therefore a very strong argument can be mounted that if neither major party can form majority government, the public interest would be best served by holding another election immediately. While we would suffer more uncertainty for a few more weeks (it wouldn’t have to be another 8 weeks!), it would be well worth it if we then end up with a majority government – regardless of whichever major party wins. Majority government would greatly reduce (though not completely eliminate) the three key uncertainties (noted above) that would otherwise impede Australia’s economic growth over the next three years. Therefore, neither major party can form majority government, I’d much rather be sent back to the polls!