Indicating Fiscal Expenditure: Should the Government Notice Consumer Confidence?

Abstract

Consumer confidence can predict and reflect consumer behaviour and economic operation, which has certain implications for the government in formulating fiscal policy. This paper investigates the relationship between fiscal expenditure and consumer confidence in China. Using the time-varying rolling window approach, we find that the interaction mechanism between fiscal expenditure and consumer confidence is complex. On the one hand, the positive impact of fiscal expenditure on consumer confidence can confirm that a rise in fiscal expenditure increases the total demand and stimulates consumer sentiment. However, as consumer confidence is a “barometer” of economic health, it reflects more than changes in fiscal spending. This could lead to a divergence between consumer confidence and fiscal expenditure. In addition, consumer confidence influences fiscal spending negatively, suggesting that consumer confidence is a leading indicator of policy on fiscal expenditure. Low consumer confidence could stimulate the government to expand fiscal spending in order to restore the total demand and promote economic activity. Therefore, the government should closely observe consumer sentiment in the process of policy formulation and implementation.