Recent research has looked at the ‘political business cycle’ (PBC) – which refers to the government of the day manipulating economic policy to boost their re-election chances. Examples have been as follows:
- increasing unemployment benefits
- reducing taxes
- increase in child benefits
- promising greater spending in certain sectors
PBC as you would expect is prevalent when elections are closely fought and is more pronounced in developing economies. However in election year spending rarely stimulates economic growth and firms tends to put investment on hold – 4.8% reduction than in non-election years. This suggests that there is a reverse political business cycle. It is only when the election is a foregone conclusion that investment remains constant.
Source: The Economist