How the world’s record share of elections will ripple through the economy

A record share of the world’s population will vote this year, with elections in more than 60 countries. The polls will have a notable impact on economic policy around the globe: Goldman Sachs Research finds that government spending tends to increase, central banking policies tend to ease, and economic uncertainty drifts higher in the runup to election day.

“Elections will therefore be an important, if not the most important, macro story in 2024,” Goldman Sachs economist Joseph Briggs writes in the team’s report.

In addition to the US presidential election, the EU will hold parliamentary elections in June, and the UK will likely hold a general election sometime in the second half of the year. A number of major emerging economies — including India, South Korea, Mexico, and South Africa — will see voters go to the polls.

While it’s too early to predict the outcomes of most of those races, our economists point out that a long line of academic research has signalled that elections lead to predictable policy shifts, or "political business cycles,” that raise output and lower unemployment in the short run.

What happens to government spending in an election year?

Goldman Sachs Research’s analysis of more than 1,100 elections in 152 developed and emerging markets suggests that primary fiscal balances as a share of GDP decline by about 0.4 percentage points (a negative balance means the government spends more than it receives) on average in election years. That reflects both spending increases and revenue declines. The effects tend to partially persist into the year after the election, before fading after two years.

“The most direct way politicians could try to steer election outcomes is by easing fiscal policy to provide a boost to the economy in the runup to election,” Briggs writes.

The extent of fiscal easing tends to vary depending on a country’s level of income, whether it has a democratic system, and whether the majority party has full control of the lawmaking process. Our economists also found signs of fiscal easing both in countries where elections are regularly scheduled and where election dates are chosen by the ruling party.

“We estimate larger effects in lower-income EMs and less democratic countries — patterns that intuitively suggest that politically-driven fiscal policy is more prevalent in countries with weaker institutions,” Briggs writes.

Monetary policy also tends to ease during election years. But again, much depends on the strength and independence of the institutions that make policy. Central banks differ in their autonomy, mandate, organizational structure, and process for appointing leaders. Because of this, the potential for political influence in setting monetary policy varies substantially across countries.

Across the board, our economists find that policy rates during election years decline by 20 to 25 basis points more than would be explained by other economic factors. But similar to their finding that fiscal policy is more responsive to elections in countries with weaker institutions, their research also indicates that monetary policy responds more to elections in places where central banks are less independent. They find no effect on policy rates in the years before an election, but there are signs that policy in election years partially persists for up to two years after the poll.

Countries with central banks that score highly for independence show no notable effect on policy rates during elections, according to the research. This suggests the Federal Reserve and other developed market central banks — which generally score as highly independent — are unlikely to change policy because of election considerations.

Economic uncertainty can be a headwind for investment

Though politicians tend to keep policy adjustments to a minimum in the run-up to elections, uncertainty around what will come next can impact economic choices. The Economic Policy Uncertainty Index — which is based on things like newspaper mentions, fiscal policy provisions set to expire, and disagreement among economic forecasters — shows that policy uncertainty increases on a broad basis in US presidential election years. The report finds similar effects in other countries.

“The policy uncertainty inherent to elections and the possibility of leadership change could pose a modest headwind to investment and growth,” Briggs writes.

Our economists find that a 10-point increase in the Economic Policy Uncertainty indices had tended to lower GDP growth by 10 to 15 basis points in the quarter when the increase happens and the quarter that follows. This implies a modest hit to annualized GDP growth of 0.2 to 0.3 percentage points in quarters around elections, with a smaller effect of 0.1 to 0.2 percentage points on full-year GDP growth.

“Taken together, our estimates suggest that elections have a predictable but modest impact on economic growth, with a moderate easing in fiscal policy and modest easing in monetary policy being partially offset by a modest growth drag from increased policy uncertainty,” Briggs writes.

Goldman Sachs Research also finds that these predictable election-related economic effects are less likely to cause sharp reactions in financial markets than the potentially more significant shifts in policy that happen after an election.

“We anticipate that this year’s US presidential election will be a particularly market-relevant event, as the macro impacts of the election regarding several key policy issues could have more significant impacts on rates and (currency) markets,” Briggs concludes.