Economic performance, management competence and the outcome of the next general election

Economic Performance, Management Competence and the Outcome of the Next General Election David SANDERS University of Essex Working Paper n.124 Barcelona 1996 A number of models of UK electoral preferences, based on aggregate-level popularity functions, have been developed over the last 25 years or so1. The early models all assumed that there were direct connections between the condition of the macroeconomy (generally measured in terms of unemployment and inflation) and the pattern of support (as indicated by monthly or quarterly opinion poll ratings) for the major political parties: governments were «rewarded» with greater support if their performance was «good»; they were «punished» by reduced support if performance was «poor»2. The main aim of these analyses was typically to establish how much extra support a government could expect to obtain if it reduced either unemployment or inflation (or, even better, both) by, say, a percentage point over a 3-month period. During the 1980s analysts began to include voters’ perceptions of the state of the economy, rather than just its «objective» condition, as predictors of political support3. These analyses suggested that voters’ perceptions of what is happening to the economy appear to be more important in determining patterns of political support than the economy’s objective condition -though, obviously, there are important connections between macroeconomic changes and electors’ economic perceptions. In the l990s, analysts have finally begun to follow through the statistical logic of their popularity functions. They have ceased to employ these functions simply as devices for analysing the past fortunes of political parties and have started to explore their utility for forecasting future movements in political support4. I have reviewed elsewhere the success of one simple forecasting model that correctly predicted the outcome of the 1992 British general election -some 18 months in advance of the event5. In this paper I discuss the prospects for successfully forecasting the outcome of the next UK general election. The paper’s main methodological concern is with the problem of deciding which estimation period should be used in order to produce a particular set of political forecasts. The principle substantive aim to develop a series of models that simulate the likely political fortunes of the present government over the next year or so. Given that Labour popularity generally varies inversely with that of the Conservatives6, I concentrate solely on developing a suitable popularity function for the Conservative Party. The first part of the paper briefly reviews some of the evidence which supports the conclusion that UK voters’ subjective economic perceptions are more important than objective economic realities in determining their political preferences. The second part develops a series of forecasting equations based partly on different estimation periods and partly on different assumptions about which particular economic perceptions will prove decisive in British politics in the run-up to the next general election. Although the precise results of the various forecasting models differ, they all converge on the conclusion that the Conservatives cannot recover sufficiently on the basis of purely economic considerations to win that election. THE IMPORTANCE OF ECONOMIC PERCEPTIONS Figures 1-7 show the general connections (or lack of them) between Conservative Party popularity and a range of measures of economic performance. (I assume throughout the ensuing discussion that increases in unemployment, inflation, interest rates and taxation7 connote «bad» performance whereas increases in disposable income connote «good» performance). With the possible exception of the two interest rate variables and taxation (which tend to trend upwards when popularity trends downwards and vice versa) what is remarkable about the various figures is the lack of any obvious visual relationship between popularity and economic conditions. Indeed, as Table Al in the Appendix indicates, this conclusion is also supported by more formal statistical models. These models show that, when appropriate controls are made for aggregate economic perceptions and for certain key political events, unemployment, inflation, personal disposable income and interest rates -whether measured as levels, changes in levels or rates of change; whether lagged or unlaggedall fail to exert direct effects on Conservative popularity. To analysts unfamiliar with recent work on British popularity functions, this conclusion may seem surprising. What has become increasingly clear over the last decade or so, however, is that the effects of the real economy on UK voters’ political preferences are strongly mediated by voters’ economic perceptions. The relationship between incumbent party popularity and one of the pivotal sets of economic perceptions is shown in Figure 88. As the figure shows, when aggregate personal economic expectations rise, the Conservatives’ poll ratings also tend to rise -and vice versa. The theoretical interpretation of this relationship is simple. If I am optimistic about my economic prospects, I am more inclined to seek to preserve the status quo that has produced my optimism; if I am pessimistic about my economic prospects, I am more inclined to seek to change the status quo that has produced my pessimism. As Figure 8 clearly demonstrates, the general elections of 1983, 1987 and 1992 were all preceded by a lengthy period of gradually rising personal expectations -the ideal platform for an incumbent government to secure its own re-election. More formal statistical models of the relationship between personal expectations and government popularity show that it is both stable and robust over the 1979-1994 period9. The balance of evidence also suggests that it is personal expectations that have exerted a causal influence upon Conservative support rather than the other way round. Simple exogeneity tests confirm that, whereas lagged values of personal expectations predict popularity, lagged values of popularity do not exert a significant impact on expectations10. The intriguing questions in this context, of course, are: «What is it that influences personal expectations?»; and «Does the economy at least affect expectations even if it fails to exert a direct effect on incumbent party popularity?» Table A2 in the Appendix carries out tests analogous to those shown in Table A1, using aggregate personal expectations as the dependent variable. The table shows that the only significant macroeconomic influences on expectations during the 1979- 1994 period were (1) changes in real interest rates (which exert a negative effect: when real interest rates rise, expectations fall) and (2) the volume of transactions in the housing market (which exert a positive effect: when transactions are buoyant, so are expectations). I return to the character and implications of these various connections below. Personal economic expectations, however, are by no means the only economic perceptions that are capable of mediating the relationship between the objective economy and political support. A second potentially important set of perceptions concerns attributions of responsibility for economic success or failure. Individual voters may or may not hold government responsible for whatever is happening to the economy. If the economic news is good, voters may not credit the government for it. If the news is bad, they may lay the blame on someone or something else. In circumstances such as these, we would clearly expect to observe no relationship between objective economic change and support for the government. Unfortunately, the problem with the attribution question is that there are no continuous, over-time data available which might enable us systematically to measure the extent to which governments are held culpable for economic success or failure. To be sure, there are some fragmented data which relate to the position of the current government. (These suggest that there has been a marked change since the last election in the extent to which voters blame the government for the length and depth of the 1990-1993 recession. By the spring of 1994, almost three quarters of Gallup’s respondents believed that the government was either «very» or «somewhat» responsible). The lack of a sustained timeseries, however, means that in the UK context the long-term role of voters’ perceptions of government culpability simply cannot be assessed. A third set of economic perceptions is potentially the most important of all. These concern the extent to which the government is seen as being competent to manage the economy. Survey questions about the relative merits of the Tories and Labour as economic managers have been asked periodically since 1964. Almost without exception (one notable example being at the time of the introduction of the poll tax in March 1990), the Conservatives have been more favourably regarded than Labour. Not surprisingly, perhaps, the party which has traditionally been viewed (rightly or wrongly) as representing the interests of business has tended to be seen as the one most able to run a mixed economy. Since the beginning of 1991 Gallup have included an economic competence question in their monthly Gallup 9000 survey. This means that, for the first time, we now have a continuous series of observations which measure mass perceptions of the relative economic competence of the two major parties. Figure 9 shows what happened to these perceptions between January 1991 and August 1995 -and how changes in them appear to have corresponded to changes in support for the government. Until the middle of 1992, the competence series is above the zero line -reflecting the clear lead which the Conservatives had apparently enjoyed for most of the period since 1964. Note, however, what happened at the time of Britain’s ignominious exit from the ERM in September 1992. The competence graph (as well as the popularity graph) plunges downwards and continues to trend downwards thereafter. Although there can be little doubt that the Conservatives have only themselves to blame for this downward shift in their fortunes, it is worth emphasising the complementary role played by the Labour Party. Since the mid 1980s Labour has progressively shed the image of extremism and irresponsibility in which it cloaked itself as a result of the 1983 manifesto. The 1989 Policy Review moved Labour back towards the centre ground of British politics. Since the 1992 election, John Smith’s Presbyterian rectitude and Tony Blair’s evident moderation have further extended Labour’s appeal. The shift in the graph described in Figure 9 owes just as much to Labour’s self-transformation as it does to the Conservatives’ failure to satisfy the electorate’s economic aspirations. It is worth noting, finally, that the Conservative lead on economic competence that was evident until mid 1992 had almost certainly been a crucial background resource that predisposed many voters to support the Conservatives electorally -particularly in times of economic uncertainty. From the time of the ERM crisis in September 1992, that resource seems to have dissolved. Whether it was the trauma of the crisis itself that provoked the step-shift in perceptions, or whether the crisis merely triggered a change in perceptions that, as a result of three years of recession, was «waiting to happen», is impossible to say. In any event, there can be no doubt that, since September 1992, the Conservatives have lost a crucial support cushion which they must restore if they are to stand any chance of re-election in 1996 or 1997. Where does all this leave us? What the forgoing discussion suggests is that the connections between macroeconomic changes and UK government popularity since 1979 have been fundamentally indirect. The effects of the macroeconomy during the 1980s and early l990s operated mainly through voters’ personal expectations: when real interest rates rose (fell), so did expectations; and when expectations rose (fell), so did government popularity. Most other macroeconomic variables (with the exception of taxation and property transactions) failed to exert either direct or indirect effects on government popularity. The sort of two-stage model of Conservative support implied by this analysis is summarised in Figure 10. The parenthetic reference in the figure to «economic competence» reflects the potential importance of these perceptions as implied by the evidence presented in Figure 9 above. The reference to «press coverage» reflects research conducted for the 1979-1987 period -not developed here because of lack of data availabilitywhich shows that expectations can be significantly affected by the way in which the national press reports economic news11. THREE FORECASTING MODELS FOR 1996-1997 A number of serious difficulties invariably confront the political forecaster. Since it is not possible to discuss all of them here -and since they are summarised elsewhere-12 I focus here on a problem that is often paid relatively scant attention: that of the length of the estimation period which should be used in order to generate forecasts. The standard econometric solution to this problem is simple: use the longest contingent time period available. Although this solution is entirely satisfactory for a model that is thought to be very well-specified, it is less attractive in circumstances where many of the possible influences upon the dependent variable in question simply cannot be effectively measured. In politics, unlike in macroeconomic relationships, there are many intangibles -symbols, identities, personalities, policies, external threats and challengesthat change in ways that are not susceptible to formal modelling. In these circumstances, the average relationship between a given Yt and Xt, over the last thirty years may not be as good a guide to their likely relationship over the next three years as their more recent relationship. Indeed, in political forecasting, until we have contrived more effective ways of operationalising what is currently unmeasurable, the choice of estimation period must depend upon the analyst’s judgement as to which past period the medium-term future is most likely to resemble. The ensuing analysis tests out the implications of using different estimation periods in order to produce medium-term forecasts of UK government popularity. Specifically, I consider the consequences of estimating a particular popularity function against data from two different (but overlapping) time periods and then using each of the resultant models to forecast popularity in the same post-sample period. Thus, a popularity function is developed which is estimated (a) for the period June 1979-December 1993 and (b) for the period January 1991-December 199313. The parameter estimates from (a) and (b) are then employed to generate two different sets of popularity forecasts for the period January-November 1994. The discussion focuses on the differences between these two sets of forecasts and on their accuracy in predicting actual government popularity levels during 1994. A third function is then developed which incorporates additional data on economic management perceptions -data that, as noted above, are only available for the period since January 1991. Table 1 presents a simple forecasting model for the 1979-1993 period14. The two-stage model, based on the relationships outlined in Figure 10, is derived using the standard general-to-specific econometric methodology advocated by Hendry and his associates15. The initial specification for the popularity equation embraced a large number of lagged and unlagged candidate predictor variables. These included: (1) measures of the objective economy such as unemployment, inflation, disposable income, taxation, and (real and nominal) interest rates -as in Tables A1-A2, all measured as levels and as changes in levels; (2) a measure of aggregate personal economic expectations; (3) and a series of potentially important «event dummies» (such as the Falklands War)16. The final specification retains only those variables that exerted a significant effect on Conservative popularity. Similarly, the initial specification for the expectations equation included the same set of objective macroeconomic measures and event dummies. It also included a measure of the volume of property transactions -in recognition of the peculiar importance of the housing market during the 1980s in fuelling UK consumer confidence. The final specification retains only those variables that exerted a significant effect on expectations. Several features of Table 1 are worth highlighting. First, only one of the objective macroeconomic measures -taxation- exerts a direct (and marginally significant) effect on Conservative popularity over and above the highly significant effects of personal expectations. The negative sign on the coefficient indicates that increases taxation -as common sense would suggestserved to reduce support for the government. As anticipated in the earlier discussion of Figures 1- 6, none of the other objective measures directly affects support. Second, the Falklands War (in the spring of 1982) and the removal of Margaret Thatcher (in November 1990) both boosted government popularity -though, as the coefficient on the lagged dependent variable indicates, these effects discounted quite rapidly (at the rate of .83 per month). Third, aggregate personal expectations during the 1979-1993 period were significantly affected by two macroeconomic variables: changes in real interest rates (lagged by 2 months); and the level of property transactions (lagged by three months). The signs on both of these variables are in line with theoretical expectations: reductions in real interest rates and a strengthening property market both served to raise aggregate expectations. Fourth, the Falklands War and the removal of Thatcher also boosted expectations, while the introduction of the poll tax (in March 1990) significantly reduced them. Again, however, the effects discounted relatively quickly -at the rate of .80 per month. Finally, it is worth stressing that the reported equations all pass the standard battery of diagnostic tests17. Table 2 describes an equivalent model to that shown in Table 1 for the period January 1993 to December 1993. The specification differs from the longerterm model in Table 1 in two minor respects: (1) the property transactions terms is dropped from the expectations equation because it is non-significant over the 1991-1993 period; and (2) in the popularity equation, a change in taxation variable (lagged one month) replaces the simple level of taxation index that appears in Table 1 -on the grounds that this specification, for the shorter time period, produces a better fit to the data. The general account of the determinants of government popularity that the results provide, however, is very similar to that indicated in Table 1. Popularity is influenced positively by aggregate personal expectations (note the similarity of the expectations coefficients in Tables 1 and 2) and negatively by taxation18. Expectations, in turn, are influenced by changes in real interest rates -again lagged by two months. But if these two models both provide parsimonious, theoretically plausible and statistically significant descriptions of the respective time periods to which they refer, how well do they predict changes in Conservative popularity after December 1993? Table 3 shows the relevant results. It displays the popularity forecasts for 1994 generated by the two models outlined in Tables 1 and 2, together with the size of the residual associated with each forecast (the difference between observed and forecast popularity) and a summary measure of the overall accuracy of the forecasts. What is clear from an inspection of Table 3 is that neither the 1979-1993 model nor the 1991-1993 were particularly good at forecasting what was to happen to Conservative popularity during 1994. The long-term model is particularly weak in the sense that it consistently overestimates Conservative support. (Its «root mean» score -its average prediction erroris 3.5). Indeed, the 1979-1993 model produces a negative residual of increasing magnitude as the year progresses: by November, it overestimates Conservative support by almost 5 percentage points. The shortterm model provides some predictive improvement in terms of its lower root mean of 1.2. However, its pattern of underestimation (January-July) and subsequent overestimation is worryingly systematic: a convincing set of forecasts would exhibit a far more random pattern. Although neither set of forecasts makes a compelling case for the estimation model on which it is based, the results shown in Table 3 lend some support to the notion that short-term models may be more appropriate than longterm models in the generation of political forecasts. The statistical model described in Table 1 undoubtedly reflects the very strong relationship that existed between Conservative popularity and personal economic expectations during the 1980s and early l990s. It is possible, however, that that relationship was predicated upon the existence of some other, unmeasured, factor which was relatively constant between 1979 and, say, 1992. If this was indeed the case, then a forecasting model based largely on a period when the unmeasured factor was constant might well prove less satisfactory than an equivalent model based mainly on a period when the unmeasured factor was changing. The evidence presented in Figure 9 above corresponds exactly to the sort of «unmeasured factor» referred to here. Such fragmented evidence as there is suggests that, during the 1980s and early l990s, the Conservatives consistently enjoyed a reputation for sound economic management skills. Between January 1991 (when economic management competence was first assessed on a regular monthly basis) and September 1992, this reputation continued. From the time of the ERM crisis, however, the Conservatives’ management reputation has gone from bad to worse. It seems plausible to argue in these circumstances that this change in voters’ competence perceptions may have damaged the linkage between expectations and government popularity upon which successive Conservative chancellors were able to rely between 1979 and 1992. I may be more optimistic about my future economic prospects but, if I believe strongly that the main opposition party is best able to manage the economy, I may not want to there is no evidence to suggest that expectations will rise as high as +5 points in the run-up to 1997; and (b) that the expectations-government popularity relationship may itself have been fractured by the failure of the Conservatives, in the wake of the ERM crisis, to sustain their reputation for competent economic management. Moreover, all of these simulated results need to have two very prominent caveats attached to them. First, the macroeconomic assumptions underlying the simulated forecasts may themselves turn out to be inaccurate -in which case, the forecast figures would not be directly relevant anyway. Second, as noted earlier, each of the forecasts has a confidence interval of six percentage points either side of it. In strict statistical terms, the simulated result of 36% referred to above says that the Conservative share of the vote will be between 30% and 42% (Some prediction!). Although it counsels caution, this technical limitation does not mean that the forecasting exercise is valueless. While it is true that we can only be 95% confident, given the specified assumptions, that a popularity forecast of, say, 32% will be associated with an observed popularity score somewhere between 26% and 38%, this is not the only interpretation that can be made of the forecast. Another -and equally validinterpretation is to regard the 32% «point» forecast as the best guess that we can make, on the basis of the available empirical evidence, of the consequences that certain specified macroeconomic changes are likely to have for Conservative popularity. Of all the possible consequences of the specified exogenous changes, the point forecast represents the one most likely to occur. The confidence interval represents the size of the «health warning» -and, in the present context, it is clearly a considerable onethat needs to accompany any forecast. The forecasts developed here are not presented as firm predictions of what will happen in the spring of 1997. Rather, they are presented -extremely tentativelyas a loose indication of the sort of recovery in support that the Conservatives can reasonably expect to achieve as their re-election strategy develops over the next year or so. SUMMARY AND CONCLUSIONS The condition of the domestic economy exerts a profound influence on the political preferences of British voters -but it does so in a variety of complex and changing ways. During the 1980s and early l990s, with (as far as we can tell) a clear majority of voters believing in the superior economic management skills of the Conservatives, successive Chancellors were able to pursue macroeconomic strategies -based around real interest rate and taxation reductionsdesigned to raise voters’ economic expectations in advance of each general election. In 1983, 1987 and 1992, this raising of expectations duly assisted the government in securing re-election. The relatively stable connections between support for the government and aggregate personal expectations over the 1979-1992 period, moreover, was also rather useful to political scientists. It meant that medium-range political forecasts could be made with some degree of confidence. The government could raise expectations by manipulating real interest rates and taxation; it would almost certainly attempt to do so; and if it made the right sort of reductions in both, it could expect to increase its support by a specified amount. Due to a complex set of factors which are probably impossible to model given the sort of time-series data currently available, it is possible that the expectations-government popularity relationship of the 1980s has weakened significantly in the mid l990s. Voters’ economic perceptions continue to be central to the political fortunes of the government. Since 1992, however, perceptions of economic management competence appear to have mattered more than expectations. It is in this context that both the present Conservative government and political forecasters are encountering difficulties. The Conservatives appear to have lost their reputation for competence as a result of a combination of factors -the length and depth of the 1990-1993 recession; the export-lead recovery which has been unaccompanied by a revival in domestic consumer confidence; and the new climate of post-Thatcherite economic insecuritywhich were crystalised in voters’ minds at the time of the ERM crisis in September 1992. The government apparently has little sense as to how it can revive its previous reputation for managerial competence. And it is here that the problems of the government and the forecaster coalesce. It is very difficult to devise a good statistical model which explains why that reputation was so dramatically lost in 1992. As a result, the forecaster has no compelling basis for making even contingent forecasts about future movements in the government’s competence ratings. This said, I am confident that, if the Conservatives’ competence ratings rise dramatically, the party will enjoy a corresponding recovery in its support. This reflects my conviction that the explanation for the Conservatives’ current electoral difficulties lies primarily in the loss of their previous reputation for sound economic management. Unfortunately, it is extremely difficult to specify the conditions under which the government’s reputation for management competence might be restored. In these circumstances, the most plausible forecasts that can be made are probably those which rely on the continuing operation of the (2-stage) expectations-popularity relationship. Given this assumption, the simulations conducted here suggest that, if the government is able to survive the projected loss of its Commons majority during 1996, then purely on the basis of economic considerations the Conservatives can expect to achieve a popularity rating of around 36% by the spring of 1997. Although this figure is almost 10 percentage points higher than the level currently recorded in the opinion polls, it would clearly not be sufficient to produce a Conservative victory in the next general election. Table1 Table2 Table3 Table4 Table5 Table6 Table7 Figure2 Figure3 Figure4 Figure5 Figure6 Figure7 Figure8 Figure9 Figure10 Figure11