How the economy will decide the election

As the world and New Zealand face inflationary turmoil, next year’s election will be about the economy. By Dr Dennis Wesselbaum.

In Business6 Minutes

As the world and New Zealand face inflationary turmoil, next year’s election will be about the economy. By Dr Dennis Wesselbaum.

In the wise words of President George W Bush: “I think we agree, the past is over.”

The 2020 election was dominated by only one issue – Covid-19. Since then, we have seen a clear trend in opinion polls – Labour is trending down and National is ahead of Labour.

Will this trend continue and, more importantly, what will decide next year’s election? The list of topics is long: climate change, mental health, the health system, housing, education, immigration, crime, identity, and the list goes on.

In my opinion, the famous quote of President Clinton’s election campaign strategist James Carville, “It’s the economy, stupid”, says it all.

Research has shown that the fate of the incumbent party in an election depends largely on the short-term performance of the economy. The link between economy and election is particularly strong when one party is in power.

In many countries, the robust finding is that the state of the economy (either measured by inflation, unemployment, or income) affects the approval rating of the government and election outcomes.

This not only holds for “real” economic data, but also about the perceived state of the economy.

Along this line, in political science, one often distinguishes between the retrospective voter and the sophisticated or prospective voter. The retrospective voter looks at the recent performance of the economy and is more likely to vote for the incumbent when the economy is doing well. The prospective voter focuses on the parties’ economic policy plans and visions for the future.

I doubt that facts will decide this election. If they were to, then Labour would be in a bad situation. Inflation is close to above 6%, unemployment is close to 6% (when taking into account the work-ready Jobseeker support programme), and GDP is very volatile. So-called repayment deficiencies (loans for which actual repayments are below scheduled) have more than doubled since 2019 and are high, potentially foreboding more stress, especially for highly leveraged house owners when interest rates keep increasing.

Further, the Government is now employing about every fifth worker in New Zealand. From 2020 to 2021, the government added 3948 full-time equivalent workers (an increase of about 7%) and ministries under Labour have spent millions of dollars on consultants and contractors – in 2020/2021 MBIE spent $90m, Ministry of Education $176m, and Ministry of Social Development $94.8m).

The election will be decided by the state of the economy in 2023 and how voters perceive the economic plans of National and Labour.

Since we do not have the economic election plans available, we can only have a look into the forecast for next year.

How will the economy look in 2023?

International Monetary Fund projections are that world economic growth will slow and the World Bank is forecasting more supply bottlenecks. This is likely to create head wind and suggests lower growth rates here in New Zealand. In fact, the OECD projects real GDP growth to be 3% in 2022 and 2% in 2023. It also states (and we already see evidence for this) that private consumption will fall. It projects that inflation will fall but remain high in 2023 because of global commodity prices and wage increases. According to Reserve Bank of New Zealand (RBNZ) forecasts, house prices will continue to fall and so will residential investment. Further, the RBNZ predicts that GDP will grow more slowly and unemployment will increase. Overall, the outlook does not look promising, despite (or because of) the normalisation in the inflation rate.

The election next year will be crucial for the path New Zealand will take. Voters, and hence political parties, have become increasingly polarised in many countries in the recent past and the New Zealand election will be no exception.

Along this line, next year’s election will decide whether New Zealand goes further down the route of a paternalistic, big government or whether the responsibilities will be put back with the individual. In the words of President Ronald Reagan: “We’ve gone astray from first principles. We’ve lost sight of the rule that individual freedom and ingenuity are at the very core of everything that we’ve accomplished. Government’s first duty is to protect the people, not run their lives.”

  • Dr Dennis Wesselbaum is a Senior Lecturer in the Department of Economics at the University of Otago.