PM's election call is hardly a boon for the business community

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The Conversation 30th January, 2013

Julia Gillard has now confirmed what everyone already knew: there will be an election sometime in August or September this year. We now know the precise date: September 14. That is also the Jewish Day of Atonement (Yom Kippur). Some might enjoy the irony.

This will probably be the longest federal election campaign in history. Two important questions arise. Is this really good for business confidence, as Ms Gillard suggests? Is this good for the government? I suspect the answer to both questions is "no".

Betting markets had already indicated that the election would most likely be held around that time anyway. We now have a precise date, but does the actual date really matter? We need to consider whether it is the election date that is the source of uncertainty, or the actual election itself.

I suspect it is the election itself. Every election gives rise to regime uncertainty. That is the possibility that a change in government policy will adversely affect business. This is likely to happen irrespective of whether the government wins or loses the election. Even when government wins, elections are a time where a raft of new policies are presented to the electorate. Of course, when government changes hands, a lot of existing policy is changed (and new policies introduced). So I'm not convinced that announcing the date of the election will change any concerns the business community may have regarding future policy directions.

But we do now have an additional consideration. The date of the election is known, but the government is not in caretaker mode. Given the expectation that the government will lose the coming election, should it be in caretaker mode? Reasonable people can disagree on this point. After all, having the government in caretaker mode for eight months is a bit too long. Yet can the business community - and anyone else - be confident that announced policy will be implemented? I suspect not.

If anything, this early announcement has added to uncertainty and not reduced it.

The next question is whether this is good for the government and, by extension, Ms Gillard. The Prime Minister has an important electoral advantage in determining the timing of elections. This can be thought of as an option. Options are valuable, and are more valuable the longer the time until expiration. So a later election is more valuable, everything else being equal, than an early election. That is fine, but Ms Gillard has given up the flexibility to call an early election if it suited her to do so.

That means that she is not maximising the probability of re-election. That doesn't make sense - our electoral system creates an advantage for the incumbent prime minister to seek re-election at the time that best suits their chances of re-election. Now we can quibble about whether it should or shouldn't, but the government's supporters have every right to expect the prime minister to make full use of that advantage.

Just as corporate executives might not always act in the best interest of the shareholders, individual politicians might not act in the best interest of the party. I suspect this announcement locks Ms Gillard into the leadership - at least, that is her calculation. It would be difficult for a challenger to depose her now that the election date is known.

An eight-month election is going to be long and dreary. The government is likely to lose and policy uncertainty is likely to be high anyway. I don't see how the early announcement assists business, but I can see how it might shore up Ms Gillard's position within the government.