CANBERRA OBSERVED: News Weekly
Daunting challenges for Swan's first Budget
, May 10, 2008
The new federal Treasurer Wayne Swan's problems are being compounded by overseas events over which he has no control.Labor's economic strategy on taking power late last year was based on a time-honoured convention in Australian politics, but events are rapidly overtaking those tactics.
The textbook strategy consists of a neophyte Treasurer finally getting his hands on the Treasury books, expressing shock at the profligacy of his predecessor, and using that alleged irresponsibility, together with the goodwill of the people who have just voted for the new government, as the excuse to make tough decisions early.
Of course, the federal Treasury, having a rare chance to axe many of its pet spending hates, plays a not inconsiderable part in urging the new Treasurer to act tough.
With a short three-year electoral cycle, the newly-elected government knows it also has to build a bank for the promises it will make at the next election - a war-chest for securing a second term.
After that, the politics of incumbency gets progressively harder.More complicated
The strategy just outlined was what Labor's Treasurer Wayne Swan had been expecting, but the reality of that path has become not only more complicated but more treacherous with each passing month.
First, there was no obvious government mismanagement, and Labor inherited a massive and growing budget surplus.
With a resource-fuelled economy pouring tens of billions of dollars into government coffers and the seemingly unstoppable windfall of the indirect tax system (the GST), Mr Swan could not mount a credible argument that the previous government had been fiscally irresponsible.
Mr Swan has therefore been using the inflation bogeyman instead to justify savage cuts to government spending.
The Government says it is worried that inflation has broken out of the 2-3 per cent safety zone set by the Reserve Bank and wants to nip it in the bud before it becomes entrenched at a higher level.
But the Treasurer's job in the May Budget is being weighed down by international factors over which he has absolutely no control, such as rising global inflation, a US economy which is hurtling towards recession, and the worst credit crunch since the Great Depression.
Mr Swan's predicament is made even more difficult by having two off-limit areas: he cannot renege on the $33 billion of tax cuts promised at the election, and he is not allowed to criticise the spending of state governments.
Certainly, the previous Howard Government had become lax and occasionally reckless with taxpayers' money, particularly on government advertising and consultancies.
It had also fallen into the trap of giving away hand-outs to lobby groups in order to win elections.
But, as Finance Minister Lindsay Tanner and other members of the razor-gang have discovered, the "easy" pickings from government largesse are raising relatively small dividends.
Going through hundreds of obscure government programs grants and obscure agencies with a fine tooth-comb is a worthwhile exercise, but is likely to raise only a few hundred million dollars - a billion at the most.
Big savings may be found in defence, where mismanagement is rife but where multi-billion-dollar contracts cannot easily be broken.
Big savings can be made in welfare, but only over time by putting more people who are on long-term unemployment or disability pensions into the workforce.
And cuts to family payments, childcare benefits or private health insurance subsidies are political dynamite.
But unless Mr Swan does take the axe to the Budget, the Reserve Bank will continue to put the squeeze on Australia's homeowners, which means he is between a rock and a hard place.
Mr Swan's problems are being compounded by events overseas, including soaring oil prices, rising food prices and food shortages, prompting international forecasters to predict potential nightmarish scenarios, including famines.
The international credit crunch is already pushing up interest rates for homeowners and business beyond the official rate rises, and Australian authorities are becoming increasingly concerned about the instability on financial markets.Recession
The Federal Opposition believes that Australia may already be heading for a mild recession and that Mr Swan will be doing further unnecessary damage if he cuts government spending further than he needs to.
Former Reserve Bank Governor Bernie Fraser has also warned the new Government that it should not become too pre-occupied with inflation and that a slightly higher rate could be accommodated.
Mr Swan, who has had a shaky start in the job, knows also that his own reputation is on the line and that a "bad" Budget could do untold damage to his political prospects.
The May Budget should have been an easy task, but in fact it will be one of the most risky in at least a decade.