Why Governments Raise Taxes After Elections and Its Stock Market Impact
Translated & summarized from Bizportal by baba
Governments tend to enact unpopular tax hikes and budget cuts after elections, a trend supported by IMF data. Despite these measures, the Israeli stock market has historically shown strong performance in the year following elections. This phenomenon is likened to corporate "house cleaning," where early, tough decisions can lead to long-term economic stability and investor confidence. The focus for understanding future economic direction should be on the new government's fiscal policies and budget, not just election promises.
The story in 6 lines · by baba
- Governments often implement unpopular tax hikes and budget cuts after elections, according to IMF data.
- The Israeli stock market has historically performed well in the year following elections, averaging 16% returns.
- This post-election fiscal action is compared to corporate "house cleaning" to address economic issues.
- Past Israeli examples include austerity measures in 2003 and VAT hikes in 2013.
- Investors focus on long-term economic stability, not just short-term consumer impacts, when evaluating fiscal policies.
- Future economic direction depends more on a government's budget than election slogans.
Governments often postpone unpopular decisions, such as tax hikes and budget cuts, until after elections, a phenomenon supported by a study of 22 countries from 1990-2018 by the International Monetary Fund. This post-election period allows politicians to address difficult fiscal measures without immediate electoral consequences, leveraging the public's potential short-term memory or the ability to blame previous administrations.
Interestingly, this period has historically coincided with strong stock market performance. A Tel Aviv Stock Exchange study examining ten election cycles since 2003 found the TA-125 index yielded an average of approximately 16% in the year following elections, compared to a typical annual average of about 11.5%. While global market trends contribute, this suggests a potential market benefit from these fiscal adjustments.
The market's positive reaction can be likened to a corporate "house cleaning," where new leadership implements tough, unpopular decisions early in their term to address accumulated problems. For governments, this translates to tax increases, spending cuts, and reforms that may be painful in the short term for consumers but aim to reduce deficits, stabilize debt, and lower national risk, thereby benefiting the stock market by decreasing fiscal risk.
Examples in Israel include 2003, when Benjamin Netanyahu, as Finance Minister under Prime Minister Ariel Sharon, led significant austerity measures, and 2013, when Yair Lapid, as Finance Minister under Prime Minister Benjamin Netanyahu, raised VAT and implemented budget adjustments. In both cases, the economic leadership's actions, rather than just the change in government, were pivotal.
The stock market's forward-looking perspective is key; while consumers feel immediate impacts like VAT increases, investors assess the long-term economic outlook. Successful fiscal consolidation can reduce risk and support stock performance, even if specific sectors like retail are negatively affected by reduced consumer spending. The upcoming Israeli elections present a similar scenario, where the focus should be on the new government's fiscal policy and budget proposals, rather than just election slogans, to understand the future economic direction.
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