Adrift in a sea of pain, Treasurer Joe Hockey will have spotted one glimmer of hope this week – a surprise jump in consumer confidence.
The Westpac-Melbourne Institute measure of consumer confidence increased by 7.5 per cent month-on-month, from 93.2 in January to 100.7 in February.
When this index rises above 100, optimists in the economy outnumber pessimists, and the February reading is the first time that’s happened for a full year.
For Coalition spin doctors, it’ll be tempting to argue that the Abbott government’s austerity “made room” for the RBA to cut interest rates last Wednesday, and hence this morsel of good news is all down to their superior economic management.
They’d be foolish to try that line, however.
Most of the jump in confidence is down to factors the government doesn’t control – a 21 per cent fall in the price of petrol in recent months, and a 10 per cent rise on the Australian stock market since January.
People feel richer and more optimistic, for now.
Both of these sudden boosts to the national mood are welcome, though relying on them would be risky.
The OPEC-led oil price war that has pushed down petrol prices looks set to continue for some time, and even when it ends the new energy landscape is likely to keep prices lower than when it began.
And the stock market is being pushed up by yield-hungry investors fleeing low returns in fixed-interest markets (themselves a function of the RBA interest rate cut).
However countervailing forces are at work.
As the Australian dollar falls, some of the ‘hot money’ that has flowed into the ASX from aboard may pull back, leaving the main ASX indices range-trading as before.
Nonetheless, the temporary boost to confidence is the government’s chance to atone for some of its earlier sins.
For while it can’t take credit for the confidence rebound, the government must shoulder the blame for crushing confidence with its ill-conceived first budget last May.
Its rushed attempt to get the budget back towards a surplus – particularly measures such as the Medicare co-payment, tertiary fee reform and punitive welfare cuts – has backfired in spectacular fashion.
Confidence plummeted, and so did the Coalition’s opinion poll numbers – hence last week’s aborted leadership challenge.
Meanwhile, on the left of politics, every attack on Tony Abbott’s economic plan includes a phrase such as, “of course we all know real reform is needed (but we don’t have to tell you what until just before the election)”.
This all leaves the economy in a perilous position.
The small ember of confidence needs to be fanned into a flame of growing domestic demand, to help take up some of the slack caused by the end of mining boom.
But having just watched Mr Abbott and Mr Hockey’s jobs saved by their own party room, the question has to be asked: can these two possibly achieve that task?
The balance of probabilities says ‘no’, but let’s join the optimists’ camp for a minute to see how it might be done.
Key to the process is dropping the ‘debt and deficit’ rhetoric.
At present, Mr Hockey and others have been repeating the line that the government is borrowing ‘$110 million a day just to cover interest repayments’.
How scary is that really? That’s about $4.60 a day for every Australian, or $1670 per year each.
That is a lot, but it’s what happens in the rest of the economy that provides the context to that figure.
For starters, many Australian families are in deleveraging mode, and are paying down their private debts much more quickly than in previous years.
That means the future tax burden represented by the above figures looks more manageable than if they were stacking on the private debt at pre-GFC rates.
When the RBA cuts rates, as it did last week, mortgage holders have a choice – they can reduce their repayments so that their 25-year mortgage still takes 25 years to pay off, or keep paying the same amount each month, meaning they are paying down the principal on the loan more quickly.
Many families choose the latter option, simply because they don’t have to do anything – no forms to fill in or phone calls to the bank to make.
So we are in a phase where the federal government debt is growing, and many owner-occupiers are trying to reduce their private debt – a partial reversal of what happened when a young Joe Hockey was a minister in the Howard government.
When the Howard government took over from Paul Keating in March 1996, they inherited a net federal debt of $96 billion, which they managed to pay off completely by the time Kevin Rudd took over in November 2007. They even left behind about $20 billion in spare cash for Labor to throw around.
But over the same period, previously debt-shy Australians learned how to borrow.
Adjusted for inflation (that is, in 2007 dollars), the private-sector debt secured against owner-occupiers’ houses and investment properties quadrupled from $232 billion to $909 billion.
Those two components of private debt – home mortgages and investment mortgages – now total $1.42 trillion, so credit growth has continued, albeit at a slightly slower rate.
Complicating this picture is the fact that Australia’s population grew rapidly throughout the Howard and Rudd/Gillard years, so it’s useful to look at how public and private debt has grown per person.
Federal public debt did indeed blow out through the Rudd/Gillard years, due in large part to two massive stimulus programs signed off by the Rudd government to address plummeting domestic demand during the GFC.
It is still growing, and net federal debt is now $355 billion, which is about $15,000 per man, woman and child.
So what happened to private debt?
Total private sector borrowing quadrupled over the Howard and Rudd/Gillard years ($24,780 per person to $98,736 per person today), or adjusted for inflation is 2.5 times bigger.
An important sub-set of those private debt figures is the amount of owner-occupier debt per person.
This was piled up most rapidly between 2004 and 2008 (remember all those home renovation shows on TV?), and has slowed somewhat since then (see below).
And so we come back to Treasurer Hockey’s debt and deficit story. The constant refrain is ‘we need to learn to live within our means’, and that is quite true.
But in terms of keeping the economy growing, federal tax revenues growing, and moving closer to balancing the budget in the longer term, it would be a great move to drop the debt-and-deficit bogeyman routine.
Australia has a large and growing stock of private debt, and a much smaller, but also growing, stock of public debt. Neither will bring the economy to its knees in the medium term.
On the other hand, stomping up and down on that precious ember of consumer confidence just might.
Treasurer Hockey seems to be learning. He has already indicated that further expenditure slashing in this year’s budget won’t be done at the expense of households. That implies a bit more public debt, so better not to tell voters that the sky will fall as a result. It won’t.
The numbers alone show why the Coalition must shift from fear, to hope.