Quiggin: Rudd’s political gamble, Abbott’s move is next

John Quiggin comments on the Federal Budget.

Published on Crikey on 11 May 2010.

Last year’s Commonwealth Budget represented a huge, and, for the most part, successful economic gamble. The gamble last year was that a big budget deficit would yield an economic stimulus sufficient to outweigh the associated increase in public debate and provide a basis for sustainable economic growth in the future.

As the Treasurer’s speech points out, the Australian economy has recovered strongly at a time when the US and European economies are only marginally stronger than at the depths of the recession. Public debt is now projected to peak at 6 per cent of GDP, compared to a developed world average of more than 80 per cent. The government’s claims as strong economic managers have a fair bit of credibility.

This year’s Budget is a political gamble; that the government can win re-election based on that credibility, without offering any significant electoral sweeteners. The government doubled down on this gamble with the series of backflips and repudiated promises in the leadup to the Budget, motivated largely by the desire to achieve an early return to surplus. The political price for these backflips, most notably the indefinite deferral of the CPRS, has been steep, and it’s far from obvious that the Budget will provide any offsetting bounce.

The government’s rhetoric also precludes anything extravagant in the way of election promises. Given that the projected surplus is only $1 billion, there room to move. Anything new has to be fully offset, or else justified by a further upward revision in estimates of the net position.

There are a few options remaining. The Henry Review provides a wide range of policy options in addition to the handful of measures adopted in the budget (in addition to the Resource Rent Tax, the budget implemented Henry’s recommendation for concessional treatment of interest income). Some of Henry’s measures would increase revenue and provide funding for new initiatives.

Equally, the Budget presents the Opposition with some nasty political problems as the election approaches. Tony Abbott has dissipated any credibility he might have had with a series of policy thought bubbles. The most notable was the announcement of a generous parental leave scheme, to be financed by a levy on big business, in direct contradiction of his rhetoric about Great Big New Taxes. So far, the political cost has been modest. But he cannot afford any holes in the accounting for his election platform.

Abbott now has to decide whether to match the government’s pledge of a return to surplus by 2012-13. Like the government, the opposition has no room to move, in net terms, if this target is to be met. But the position is worse than that for the coalition. The government’s projection includes the revenue from a range of measures the opposition has pledged to reject, including the means test on the private health insurance rebate, the tobacco tax and the resource rent tax. In the absence of a backdown on these measures, the opposition has to find big expenditure cuts just to break even.

The result is not one to inspire enthusiasm. But we ought to be grateful that we are facing these problems, and not those of the US, UK and eurozone.

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