The one thing that's broken is the one thing our leaders can't easily fix.It's confidence. The treasurer said so on Friday: "The problem in the economy is not a shortage of money, it's about confidence and jobs and growth."
Joe Hockey believes there's little point in injecting more money into the economy if people and businesses aren't prepared to spend it.
Reserve Bank governor Glenn Stevens said much the same thing before the parliament's economics committee while Hockey was speaking.
Stevens spoke of "that pervasive sense of caution, of feeling they don't want to take the risk".
He said it was what worried him most.
Adjusting interest rates (monetary policy) was probably less potent a tool than it used to be when people were keener to spend.
"A decade ago when there was, it seems, an underlying latent desire among households to borrow and spend, it was perhaps easier for a reduction in interest rates to spark additional demand in the economy," he said. "Today, such a channel may be less effective."
Hockey made the same sort point about tax and spending (fiscal policy)... Cutting tax or boosting government spending won't get us to spend more unless we want to. And right now we don't really want to, in part for reasons of which Hockey is well aware. We don't feel good about his budget and we don't feel good about his government.
The Westpac consumer confidence index dived after Hockey's first budget and didn't really pick up until February after the Reserve Bank's interest rate cut. Even now, it's still not back to the level it was during most of Labor's last year in office. Monday's attempt to remove the prime minister saw confidence among Coalition supporters dive 6.5 per cent. Confidence climbed among Labor supporters but much of it might have been from a feeling it made the government weaker.
All isn't lost. Cuts in interest rates still have some force, although mainly in boosting an already boosted housing market; something that concerns Governor Stevens. And targeted extra spending and extra tax cuts won't be completely wasted. But big spending cuts in order to reduce the deficit might be disastrous. Boosting consumer confidence will be hard, destroying it would be easy.
In The Age and Sydney Morning Herald
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