The confidence trick | Thought Starters

In his first appearance on 730 as Prime Minister, Malcolm Turnbull was offered by host Leigh Sales the chance to start off with the basics: to lay out the broad foundations of his economic and political philosophy. The PM – having promised to lead a “thoroughly liberal government“ on assuming the mantle – hit the predictable notes.

LEIGH SALES: Well look, let’s start with something more significant than that, which is something very fundamental and go back to first principles. What are the values and core beliefs that will be the foundation for all of the policies that your government comes up with?
MALCOLM TURNBULL: Well, this is a Liberal National government. It is a free market government. It is committed to ensuring that Australians are free to choose their own directions, whether it’s in their business or their profession or their family. So they’ve got to – so freedom is the – freedom is the key point.

The Prime Minister immediately went on to suggest that while business is free to choose its own directions, even a self-consciously lean, free-market oriented government does has an indispensable role to play for business: providing “confidence”.

LEIGH SALES: Would you consider using the mid-year economic forecast in December for a mini-budget?

MALCOLM TURNBULL: Well, it’s not something I have considered. The – we’ve only had our first cabinet – cabinet was just only sworn in today and we’ve just had our first cabinet meeting. But we’re obviously considering all of our economic responses and it is absolutely critical that we provide strong economic leadership. And you know, above all, confidence…So government has to provide the leadership, the sense that, you know, we know what we’re doing, that we have a vision, we have a clear direction and that builds up business confidence.”

As far as confidence goes, the new PM has certainly been talking the talk.

Since assuming office he has led a sharp shift in rhetoric toward a new, positive, empowered view of Australia’s economic challenges and prospects – and has already taken credit for the pickup in consumer sentiment that followed his party-room victory.

Of course, the Coalition’s faith in its ability to conjure up confidence is not new. Joe Hockey was so convinced that a change of government in 2013 would restore Australia’s economic fortunes that he predicted economic conditions would rebound as the adults were back in charge of the Treasury benches.

We know how that turned out. The surge in sentiment that accompanied the change of government evaporated well before it had the chance to deliver its first budget. Business confidence had fallen to a 4-year low by August 2015, as the leadership chatter began to pick up:


Source: Roy Morgan

By the end of its two-year run, even the Abbott’s Government’s most rusted-on supporters had lost confidence in its ability to govern in their interests. In the end, the government utterly lost confidence in its Prime Minister, its Treasurer, and itself.

But will replacing the nation’s sad face emoji with a savvy businessman with a positive story to tell be enough to restore confidence in Australia’s economic fortunes?

While the style of leadership might change, the substance of our economic challenges hasn’t.

Internationally, the outlook continues to deteriorate. This week the Asian Development Bank became the latest institution to downgrade its outlook for economic growth in China. Advanced economies in Europe and North America are still grappling with the lingering impacts of the GFC, and fresh concerns about “secular stagnation” in business investment and growth in the years ahead. Concerns about a China-led downturn that tips into a period of weak global growth – or even recession – are rising.

At home, an emphatic and effective policy response to the GFC and solid growth in China helped Australia record the strongest post-crisis growth in the developed world. But since then, we’ve gone from a leader to a laggard as resource prices ran out of puff, and our apparent surefootedness as we rode out the boom gave way to a collective shrug of the shoulders about how to deal with the bust.

Given widespread expectations of sub-par growth and the domestic and international risks on the horizon, it is little wonder confidence is hard to come by.

In this environment, while the perception of a steadier pair of hands at the tiller can’t hurt, translating confidence-inspiring talk into confidence-sustaining action is the tricky part.

As far as confidence goes, some of its most enthusiastic proponents – including, or perhaps especially, within government itself – are locked into a mindset that the best thing governments can do is to “get out of the way”.

For more radical exponents of small government, confidence is frequently invoked in service of an ideologically-driven agenda to cut social safety nets, regulation and company taxes: policies that have little to do with a professed attachment to inspiring confidence and growth, and lots to do with advancing a corporate and political agenda that can undercut both.

Nobel Laureate and super-blogger Paul Krugman captured this perfectly with his description of the “confidence fairy” in the wake of the GFC, which derided the notion that confidence would magically reappear as long as governments were willing to inflict massive, self-defeating austerity programs. Of course, rather than ushering in a rapid recovery, these contractionary policies made economic and fiscal recovery from the global crisis even more difficult than it needed to be.

While Australia has avoided the worst of the austerity trap, the same sort of thinking has seen the overblown “budget repair” imperative limit Australia’s willingness to invest now with an eye to longer-term payoffs – including in the infrastructure needed to support long term growth.

Instead, we have a sluggish growth outlook, bipartisan buy-in into a passive ‘debt and deficits’ fiscal policy narrative, and a RBA that is tired of doing the heavy lifting, unable to generate much traction with extremely low policy rates, and leery of the risks associated with an overheated property market. Key policies on tax reform, retirement incomes, health and education funding and climate change are in a state of flux. And we’re still on the lookout for the long-awaited pick up in non-mining business investment.

After a period of economic and political upheaval, businesses and voters are looking to government – if not for answers, then at least for some ideas and some leadership.

We’ll get neither if our governments keep talking themselves out of playing an active role in bridging the gap left as the boom falls away. Fairy tales about the wonders of small government are certainly not going to do the trick.

If the near 10-percentage point surge in consumer sentiment that followed the new Prime Minister’s party room victory is anything to go by, a change in style might have been as good as a holiday – for now. Then again, the same thing happened when Tony Abbott took office.

The substance will be much harder – and the scale of the challenges might shake the Prime Minister’s own confidence that the world view he outlined to Leigh Sales can provide all the answers.

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