Both the Government and the Bank need to instil confidence The most pressing issue now is not how to maintain the confidence of the financial markets but rather how to boost the confidence of firms and households in economic recovery - and thereby to make it more likely. Companies would be more likely to invest, banks to lend, and households to spend, if they could believe in economic recovery. Nor is the real economy imperative in blatant conflict with current financial objectives. The financial markets now realise that their greatest threat derives from the absence of economic recovery. There are several things that could be done. The inflation targeting regime could be tweaked to create scope for inflation to return to target over a longer period, thereby giving the flexibility to undertake more expansionary policy and to give meaningful assurance that interest rates will not rise for a long time. As Mark Carney suggested, this could be supplemented by a clear statement that rates would not be raised until GDP or employment reached a pre-specified level. Another (but controversial) measure would be to announce an exchange rate cap, as the Swiss have. The response of exporters to a lower exchange rate is bound to be muted if they have no assurance that the currency is going to stay down. Again, confidence is crucial. Fiscal policy has its part to play as well. Last week's report from the Institute for Fiscal Studies argued that after the election the Government would either have to cut departmental budgets by a further 6pc in real terms or raise taxes by £20bn. Such an increase in taxes would be madness. But households and companies may believe that it is going to happen. The Government needs to rule it out explicitly. Indeed, the Chancellor could announce much tougher future cuts in current spending, but accompanied by pre-announced reductions in taxes. Moreover, the Government needs to take actions which themselves help to boost recovery as well as encouraging private companies to increase investment. The first priority is to reverse planned cuts in public investment and indeed to increase spending on infrastructure. Of course, the Treasury will say that there are no viable projects that could be undertaken quickly. They always do. Some years ago, an advertising campaign pitched TSB as the bank that likes to say "yes." The Treasury is the department that likes to say "no." The Chancellor needs to put his foot down - lay out the plans, really commit to them, and communicate this to the private sector. I have banged on before about decisions on key projects which have large public sector involvement but which may also hold the key to major private sector spending, e.g. over London's airport capacity. The Government has kicked this issue into the long grass by commissioning a study which will not finally report until 2015. But it could lay down a timetable for what will happen thereafter and give an undertaking that one of the major options for expanding capacity will be taken. Above all, both the Government and the Bank need to instil confidence. The present Governor's habit of telling us all that we are in the worst downturn of all time and that it isn't going to get better until Doomsday has not been helpful. He may be right, but telling all and sundry doesn't increase the chances of him being proved wrong. Yes, Churchill promised us blood, toil, tears and sweat, but he also promised victory. He not only created the material means to achieve it but also, by his words and personal bearing, persuaded people to believe in it. Roger Bootle is managing director of Capital Economics roger.bootle@capitaleconomics.com