Why Policy Uncertainty Hurts the Economy
When we talk about what drives the economy, we usually think about things like interest rates, jobs, or consumer spending. But there’s something else that can quietly weigh on economic performance: policy uncertainty.
What is policy uncertainty? It’s when businesses, investors, or households don’t know what rules the government will set in the future. Will taxes go up or down? Will a new regulation pass? Will trade barriers change? When the answers to those questions are unclear, it creates hesitation—and that hesitation can hurt the economy.
Let’s break it down.
Imagine you run a business and you’re thinking about building a new factory. That means hiring workers, buying equipment, making a long-term bet. But then you hear that a major tax overhaul is being debated in Congress, and no one knows how it’ll turn out. If it passes, it could change the whole math behind your investment.
So what do you do? You wait. And that’s exactly the problem. When businesses delay investment decisions—or hiring decisions—because of policy uncertainty, economic growth slows down. That also affects workers and suppliers, rippling through the economy.
The same thing can happen in financial markets. If investors don’t know whether the government will default on its debt, or impose new capital controls, or change energy regulations, they often pull back or demand higher returns to compensate for the risk. That can raise borrowing costs for everyone.
We’ve seen many real-world examples of this. Here are just a few:
In the US, policy uncertainty spiked during the 2011 debt ceiling crisis. Business investment dipped, and consumer confidence fell.
During Brexit negotiations in the U.K., businesses postponed expansion plans for years, unsure of what trading rules would apply.
During the early stages of the COVID-19 pandemic, delays in fiscal response and shifting public health guidance created a period of extreme uncertainty—further dampening consumer spending and investment.
This doesn’t mean governments shouldn’t debate policies or change course when needed. Some uncertainty, like with the COVID pandemic, is unavoidable and some flexibility to change course is valuable. But when policies are unpredictable for no good reason, when they’re highly partisan, or when drastic changes are implemented with little warning, it makes it harder for businesses and consumers to plan. That unpredictability can cost the economy more than the policy itself.
So even in well-functioning democracies, clear, consistent, and credible policy is important. Stability doesn’t mean no change—it means change that’s signaled, well-communicated, and based on rules rather than whims. That’s what gives businesses and individuals the confidence to move forward, invest, and grow.