Angry voters punish governments for bad economic policies

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Incumbent governments everywhere are losing favor with angry voters. In June, European Parliament elections saw a collapse in the vote for incumbent parties in almost every country except Italy. India’s Narendra Modi won re-election but lost his majority and now leads a coalition. Our federal Liberals, trailing the Conservatives by 15 to 20 points for a year, suffered a surprise byelection defeat in a Toronto riding they held for three decades. US Democrats, already behind in key battleground states, are furious after a dismal debate performance raised doubts about President Joe Biden’s fitness for office.

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This week, governments in Britain and France are feeling the wrath. In the race for a snap election, British Prime Minister Rishi Sunak has been unable to dent Labour’s advantage in seven weeks of campaigning. Nigel Farage’s fast-rising Reform Party, which has been a vocal critic of Sunak’s government’s immigration policies and the weak economy in the wake of Brexit, has emerged from virtually nowhere to challenge the Conservatives and Liberal Democrats for the role of official opposition.

Sunday will see whether the right-wing Rassemblement National party, led by Marine Le Pen, wins a majority in the second round of France’s parliamentary elections. It won a third of the vote in the first round on a platform focused on curbing immigration, reducing support for Ukraine and reversing its anti-Semitic reputation with strong support for Israel. If the RN succeeds, it will force President Emmanuel Macron into a tense “cohabitation” arrangement, as the president’s powers will be limited to foreign affairs. In desperation, Macron has struck a deal with the Socialist coalition to withdraw from constituencies where he has a better chance of defeating the RN. But many of Macron’s supporters are reluctant to support the anti-Semitic socialist party France Unbowed, which they consider too extreme.

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What is the common denominator in all these elections where incumbents lose power? Rotten economic policies, about which there are four main complaints:

Inflation and affordability

Voters were pleased with the actions taken by governments to stave off a pandemic depression. But filling the gap left by lockdowns is one thing; building a mountain of subsidies on top of it, even if that boosts household incomes, is another. The largest government-wide deficits in 2020 were in the US, at 13.9% of GDP, the UK (13.1%) and Canada (10.9%). As monetary policy adjusted to the spending spree, inflation rose sharply. As wages have failed to keep up with inflation since 2020, affordability has become a key issue in many countries, including India.

Fed up voters are finding they can’t afford basic necessities, including food and energy, which have skyrocketed in price. Younger voters are being hit hard by high housing prices. Price-to-income ratios are 10.4 in Canada, 9.1 in the U.K. and 11.2 in France. (The U.S. is in a much better position, at 3.2, in part because of higher incomes.) To compound the affordability woes, taxes have risen faster than incomes in Canada, France and the U.K. since 2017 (in the U.S., revenues have been flat as a share of GDP since 2017, in large part because of Trump’s tax reform).

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Slowing economic growth

Since 2017, France, the United Kingdom, and Canada have stagnated, with virtually no cumulative growth in real gross national income per capita. The United States, with a cumulative growth of nine percent, has done better, but it is nowhere near Ireland, where real income has risen by 25 percent. The outlook for the rest of the decade is not much better, as heavy-handed government suppresses productivity growth. Voters are also resisting uncontrolled immigration, which has become a major source of growth in Canada as GDP per capita has fallen. But the influx is straining public services and contributing to housing price inflation.

Industrial and green policy

The days of relying on markets to support economic growth have given way to mercantilist industrial and trade policies. Geopolitical tensions in Europe, the Middle East, and Asia are disrupting trade and forcing governments to spend more on weapons than on butter. The energy transition has led to a global subsidy war that favors domestic supply chains. After pouring tax money into energy production and products, governments are imposing trade barriers to protect their investments. This will preserve some domestic jobs, but falling international trade is slowing global growth and raising prices at home.

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Big, fat public deficits

During the debate, Joe Biden and Donald Trump engaged in a silly finger-wagging over who had increased the deficit the most. But neither had any plan for dealing with the rising deficits and mountainous debt. The government’s consolidated gross debt has reached 123 percent of U.S. GDP, heading to 134 percent by 2030. With interest rates rising, Democrats committed to spending more and Republicans to tax cuts, the debt is only set to grow, and with it the likelihood of financial stress. Gross national debt is lower in France at 112 percent of GDP, Canada (102 percent) and the U.K. (104 percent), but debt payments are taking up an increasingly large share of their budgets, crowding out other spending.

That current governments are floundering should come as no surprise. It’s happening in Britain and France this week. It could happen in the U.S. and Canada this fall and next year. You mess up the economy, and voters punish you. To paraphrase Bill Clinton’s adviser James Carville: It’s almost always the economy, stupid.

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