Politics What Price An Election?

Just as there are leads and lags in the economy, so there are in politics. They can decide elections.
Economic forecasters pore over leading indicators that might harbour prophecies of turning points. One is business confidence. There is useful correlation between ups and downs in executive confidence and subsequent rises and falls in output.
And the economy itself is leading indicator of politics – electoral politics, that is.The buoyant economy of 2001 pointed to Labour’s re-election in 2002. The drought-strapped agricultural sector and the Asian economic crisis of 1998 nailed the coffin shut on National in 1999.
Yet in early 2002 the economy slowed (though it later picked up). And through 1999 the economy picked up. In each case the economic reverse arrived too late to reverse voter opinion.
This is not, of course, an exact science. But the experiences of 1999 and 2002 – and other earlier examples – suggest the lag between economic change and shift in voter opinion is somewhere about year.So if the economy tanks appreciably mid year this year, it could spell trouble for Clark’s Labour government in any mid-2005 election, even if the economy picks up again by early next year.
There have been, in the past couple of years, several false alarms but there is now good reason to expect the economy to slow by mid-2004.
Immigration is falling. This will reduce house-buying pressure and sales of home durables.
A real estate slide will halt the rise in house prices and maybe, in some areas, even reverse them. At the very least, credit extended on the back of inflating home valuations will not expand as it has over the past couple of years. It might even prod households out of spending into saving. Either way, consumer demand should fall and retail sales slow.
Irrespective of migration, house prices are likely to halt their upward climb simply because prices have outstripped rental returns over the past year or so and that imbalance can’t last much longer.
The rising exchange rate has also cut farmers’ and other exporters’ returns and will bite even harder as currency hedges come off. This will cut purchasing power both directly and indirectly because the outcome is slowing job market.
None of this is comfort for government facing an election by mid-September 2005. rosy economy in 2002 dropped hazy veil over other issues. In 2005 the economy cannot be counted on to obscure other issues, especially since one of them, race, has been ramped up by the National party.
What might the government do about this predicament?
It could call an early election and go to the polls before the lag between economic slowdown and voter response expires. An early election is, however, only possible if Labour can first re-build convincing lead. That possibility is not entirely in its hands.
The May Budget is, on the other hand, more under its control.
A substantial increase in spending is already committed. Much of that will go into social services, health mainly, which boosts jobs and wages in those services.More important, around $500 million will be handed out in tax credits and other help for low-income people, particularly working families, and large lower-middle-income families.
These people don’t have much spare cash. They will, therefore, spend nearly all the credits and handouts, delivering sizeable boost to consumer demand, mainly for non-durables.The export-led contraction of consumer spending will, therefore, be at least partly offset by this Budget cash injection.
And what if the government wants to over-egg the cake and spend even more to woo voters? After its February polls fright it might be tempted to do just that, to keep the economy cooking, or at least simmering, through the lag zone and into election year.
Michael Cullen has piled up big surpluses on which he could perhaps justify some timely additional spending. But since he called National irresponsible for proposing to finance tax cuts from the surpluses, Cullen could hardly pull the same trick on the spending side.
A stronger argument might be to say that slowing economy warrants an offsetting, counter-cyclical fiscal boost.
Risky, of course. And it might be undone by tighter Reserve Bank monetary policy response. Make no mistake, Labour’s No 1 priority is to get re-elected. What’s bit of fiscal flab when faced with that?

Colin James is Management’s regular political writer.
Email: [email protected]

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