Polls, policies and election miracles

James Holt

Director, Investor Solutions
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‘Miracle’ elections do happen. Just look at 2019. But are they miracles or just polling errors? And are polling errors unique or do they occur all the time and we just don’t notice? We look at this and other key factors influencing markets and policy as Australia heads to the polls.

‘The polls were wrong last time’, is a common refrain these days. But perhaps they’ve always been a little out and we just don’t notice. In most election campaigns, there’s a swing of a few per cent, often to the party offering the least ‘disruption’. Usually, like in 1998, 2004, 2007 and 2010, significant swings in the polls during the campaign doesn’t make a difference to the party people expect to win, but in extremely tight contests it can be enough to change the entire outcome. This is what happened in 1993 and 2019, hence the perception of miracles. Polling is difficult at the best of times and to be accurate to within 2% is within the standard ‘margin of error’ of most polls, even if they are perceived to be wrong. Only when a party has a lead of 53% or more at the end of a campaign can it be truly assured that it is likely win. Avoiding the surprise last minute swing is something Labor will be firmly focused on during the campaign.


Danger zone

‘Miracle’ elections are rare, favour both sides, are once off and carry costs. And they are often explained by the standard polling variability described above when elections are close. Keating won in 1993 against an opposition offering radical change. Voters don’t like radical change. Most referenda are defeated. They don’t vote for governments of either side that pledge major disruption to their lives. In 2019 this trend worked to the Coalition’s advantage.

In both 1993 and 2019, the party overwhelmingly expected to win was only registering 50-51% of the vote in the polls by election day. That’s the danger zone. A swing of 2% to the ‘party of least disruption’ completely changed the result on those two occasions. The shock loser learns from this and switches from big target to small target at the subsequent election, in effect becoming the alternative of least disruption. This is something Labor has done. With the Coalition looking increasingly unstable in 2022, all of this favours Labor.

Random events & the burden of expectation

Another problem with miracle elections is that voters bake them into expectations. Even with the government well behind in the polls many expect it to pull off another miracle, because it managed one last time. This can weigh heavily on the party. There’s nothing worse than a small lead, or being behind, but voters still expect you to win. This happened to Labor in 1996 after its shock win three years before and could be happening to the Coalition now. Another factor that favours Labor now compared with 2019.

A journalist once asked Harold Macmillan what the greatest challenge was for a statesman and he said: “Events, dear boy, events!”. But they can also be a bonus, especially for the incumbent. The arrival of the Tampa (2001) or a bad handshake can suddenly change the climate of an election. War in Ukraine or if the Opposition makes a gaffe, can suddenly make voters nervous about change.

Seats matter, not votes, and the economy (usually) rules hearts and minds

Also the winner of the popular vote doesn’t always win, as Hillary Clinton found out in 2016. The same occurs here as parties can lose the popular vote but win the most seats. This happened to Bob Hawke in 1990, John Howard in 1998 and to Menzies in 1954 and 1961. In 1998 the government won a clear majority with just 49% of the vote as its vote was spread more efficiently through a larger number of seats. Historically this favours the Coalition.

“It’s the economy, stupid", is a phrase that was coined by James Carville in 1992 and remains generally true: people vote on the economy, which seems to favour the incumbent. But it’s more complicated than that. The economy was doing relatively well in 1929, 1972 and 2007 when voters opted for change. Indeed, good economic times may make it ‘safe to change’ if the alternative is not offering revolution. Rather than favouring the Coalition, a strong economy could be neutral or help voters switch horse, which favours Labor.

Policy challenges

People often say elections don’t matter for markets, with the shock soon washed out often within 24 hours! But it is also true that the election winner defines the subsequent economic and market environment. Whoever wins may soon be bitten by reality. Right now, the economy is floating on a perfect mix of fiscal stimulus and zero rates. China looks sets to return to growth by the end of this year. Combined with a relatively benign COVID experience the unemployment rate is low, inflation elevated (but not as bad as the US), savings are high and house prices booming. Immediately after the election, according to futures markets, it looks like the RBA will fire a quiver of arrows at consumers with several rate hikes already priced in. The RBA may want to achieve policy neutrality (somewhere between 2.5% to 3.5%) over this term. That’s a lot of rate rises to come

The winner will also likely have to confront a structural budget deficit of about 2% of GDP ($40 billion) as the cycle matures. The Coalition is already hinting at a ‘reset’. That sounds like spending cuts. Labor have said nothing but there is a ready toolkit of ideas from the 2019 election to raise revenue if they choose that alternative path to balance the budget. After all, when the Liberals won in 1996 much of the Fightback package, including the GST, eventually found its way into policy. This fiscal divergence may make the most difference to economic growth and market valuations, especially if there are flow on impacts to inflation and RBA policy.

On balance, Labor has the advantage in the polls, the cycle and expectations. The government can still get lucky with events and seats, but it looks much more challenging than 2019. Either way, with the challenges facing the economy, either winner could soon find 2022 is a picnic compared to the next poll due in 2025.

 

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