CANBERRA OBSERVED: News Weekly
Economic storm facing new government
, February 2, 2008
The new Rudd Labor Government is softening up the electorate for a "tough" Budget in May.Kevin Rudd knows the length of Labor's hold on government will be determined by one measure above all others - how he manages or is seen to manage the Australian economy.
Which is why his new team has done little else since winning power on November 24 than to massage expectations about the local and international economy and to soften up the electorate for a "tough" Budget in May.
The new Labor Government has also introduced some symbolic measures to give the Reserve Bank an even greater imprimatur to be as "independent" as it sees fit, thereby taking some of the political sting out of possible further interest rate rises over the coming months.
But the problem for Mr Rudd is that, having deliberately raised expectations in the lead-up to the election about helping households balance their own budgets, the reality of being in government is immediately proving much more problematic.Stark difference
While there is certainly a case for fiscal house-cleaning and cutting waste - and the Howard Government clearly became lax in its later years - Mr Rudd's first term is starkly different from the previous three changes of government when Malcolm Fraser, Bob Hawke and John Howard took power.
They all inherited big budget deficits which required major overhauls of government spending and tough decisions.
By contrast, Mr Rudd and his Queensland sidekick Treasurer Wayne Swan have inherited a booming economy which is still pouring billions into the treasury coffers each month and building massive surpluses.
Even with the promised tax cuts and election promises it was always likely that the May Budget would deliver a strong surplus - well above one per cent of GDP.
But Mr Rudd also knows that if the US economy falters, and there is a flow-on to China, this surplus could evaporate very quickly as unemployment grows.
One of the dangers for the community is that Labor may use the calls to tame inflation to hack into items such as family benefits which are designed to give parents the choice between raising their children at home or sub-contracting the task to institutionalised childcare.
At the moment some of these benefits are not means-tested - a deliberate policy of the previous government because it believed there was a social imperative as well as a straight economic benefit in giving families the choice of home care.
Tackling waste is one thing; social engineering is another.
The truth is that Mr Rudd's ability to stop inflation and therefore interest rates is limited, and is more subject to external factors and the international markets to whom Australian households are in hock up to the neck.
True, Mr Rudd could follow the urgings of some economists and renege on the promised $30-billion in tax cuts but, given Labor's "form" under the Keating Government, this is a political impossibility.
For most of their last year in Opposition Mr Rudd, his deputy Julia Gillard and treasury spokesman Wayne Swan, made cost-of-living issues central to their campaign to win office.
Most likely regurgitating internal polling which showed that families were being squeezed by a combination of high petrol prices, rising grocery prices and steeper mortgage and rent payments, the trio attacked the Howard Government incessantly for being out of touch with "working families".
The politicking touched the right raw nerve and, combined with the unpopular WorkChoices laws which were also perceived in the community as a pro-business system to keep a lid on wage rises, was an underlying reason the Howard Government was thrown out of office so decisively by the voters.
While Australia is booming and straining in some areas with manpower shortages and pent-up demand, the international economy, led by the United States, appears to be in the early stages of unravelling.
Former US Federal Reserve bank chief Alan Greenspan says there is a 50/50 chance of a recession - which can be interpreted as a prediction of a certain recession.Timing
The timing for the new Rudd Government could not be more exquisite.
"This is not a good election to win," respected Fairfax economic journalist Ross Gittins told the Australian Business Economists Annual Forecasting Conference recently, and added a warning Mr Rudd will not want to hear.
"The Rudd Government is unlikely to be as lucky as the Howard Government [and] the chances of a recession occurring some time in the next three years would have to be high.
"There's a fair chance the Howard Government will go down in history as an exemplary economic manager, whereas Labor's reputation as hopeless economic managers will be confirmed for a generation."