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The Age

Thursday July 10, 2008

Scott Murdoch

LABOR'S big-bang tax cuts have failed to fire for the Government.

The Westpac survey of consumer sentiment has found that consumers are taking the most dismal view of the economy since the 1992 recession, and the outlook for the economy in the year ahead is down 50% from the same time last year.

The survey was taken over the course of last week - the same time as the first round of Labor's election tax cuts, worth $8 billion, were being directed the way of Australian workers.

It could be argued that the tax cuts were overshadowed by the bigger news of continuing high petrol prices, St George unexpectedly raising its key lending rate and then the doom and gloom of climate change.

Many Australian workers would have noticed their bigger pay packet for last week or, at the very least, knew that tax cuts were on the way. Labor last week was in overdrive, highlighting the savings that would be delivered to families. Wayne Swan stood at the front of a child-care centre, reciting the figures that those "hardworking Australian families" were about to receive. Consumers remained unimpressed.

Despite campaigning on

the issue during the election, there is realistically little the Government can do to reduce fuel prices or even the cost of groceries, but it gave the impression while battling the Coalition that it could.

The tax cuts would show Labor's sympathy with how tough some families were doing it. But consumers overlooked the tax measure and are still more worried by how much their mortgage is costing and how much it costs to fill their petrol tanks.

The number of new home loans taken out in May for owner occupiers was down 7.9% from April, or 23% for the past four months. These are shocking figures and should be interpreted as a signal that the national property market is unlikely to hold up, at least in price terms, as it has so far.

There was a slight pick-up in investor lending for the month, but not enough to rescue the numbers. The overall level of lending is now down by 5% in each of the states.

UBS economist Adam Carr said the weakening property market was the work of high interest rates. After 12 rate rises in six years, the back-to-back moves by the Reserve Bank in February and March took the official cash rate to 7.25%, the highest rate in 12 years.

"Shocking numbers, let's be frank," Mr Carr said. "Interest rates are biting and biting hard for the sector. Given the run of weak data, it's probably worthwhile considering some of the more positive aspects that should see things stabilise in the second half of 2008."

The RBA has flagged that it wants the economy to moderate to bring down inflation. The question is, has this happened at the right rate, or is the cooling happening too rapidly?

At this stage, a soft landing is still likely. So far, the projections show annual growth of 2.75% for the next two years and the commodities cycle is showing no signs of softening. If we didn't have the minerals, it would be a different story.

The contributions from the trade boom will provide a floor to the economy. Therefore, all the fear about recessions and the doom and gloom could be a little overdone at the moment given the fact that growth is going to remain intact.

Nonetheless, Labor faces the risk of the equivalent of a consumer backlash. Even though the Government can't bring down petrol prices, it did give the perception during the campaign that it could.

The $21.66 a week increase in the minimum pay rate this week will be a help to how the Government is perceived and, despite the concerns of the business lobby and some commentariat, it probably won't drive up inflation. It's a bit like the tax cuts: at a time when the financial squeeze is really on, consumers are more likely to save than spend.

The policy direction of the Government so far has been worthy. There's been a smattering of symbolic gestures since November and the creation of an emissions trading scheme is serious reform. But, even with tax cuts, consumers are still more worried by how much it costs to fill their fuel tanks.

smurdoch@fairfax.com.au

© 2008 The Age

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