With Parliament set to wind up in the coming week and the ructions of an explosive year beginning to fade, the reality of a more featureless landscape in the next two years is becoming clearer.

Cartoon by The Australian's Jon Kudelka

Such apparent predictability seems almost foreign after 2010 which kicked off with the game-changing retreat on emissions trading and then lurched from one crisis to the next - think the rise and fall of the mining super-profits tax, various boat controversies, the spectacular Rudd / Gillard coup, and of course the closest election in history.

Nonetheless, barring the disappearance of the Government’s numbers in some unforseen crisis of confidence, 2011 and 2012 should by rights be years of sound governance - unaffected by elections. The country needs it and in their own ways, both leaders are depending on it too.

Tony Abbott for example wants no home-grown excitement as he defies history to become the first Liberal to survive long enough after a loss to contest the next election. He needs to perform but must guard against over-reach of the typed that effectively killed off his predecessor, Malcolm Turnbull.

Julia Gillard wants no excitement either. Her aim consolidation via the delivery of stable, yet rigorous government. As one indsider said, ``now we have to under-promise and over-deliver’‘. For both, it’s all about line and length.

But the absence of major attention-stealing events will bring its own dangers for a government that has shown little stomach for the hard grind and for a polity now accustomed to a high sugar diet.

In essence, the task for Labor now is to recast its understanding of the journey. Instead of falling for the past vanity that it must win every evening’s TV news bulletins and never do anything that threatens its polling supremacy, it should steel itself for the opposite path. This involves viewing the electoral term as a whole - being prepared to take tough decisions and be unpopular for them, possibly for an extended period, while cementing in place serious reforms likely to get a tick from voters down the track.

This begins with the May budget. Now that it is clear of the global financial crisis, the Government should be considering how to set itself up in its middle and final year. A more rapid re-building of the country’s fiscal position after the pump-priming of recent years is the priority.

The recent Mid-Year Economic and Fiscal Outlook (MYEFO) showed that despite declinig revenue, the promised 2012/13 surplus of $3.5 billion, is safe although dropping fractionally to around $3.0 billion. Wayne Swan called it ``the fastest fiscal consolidation since the 1960s”. That’s not bad considering the depths of the crisis, the extent of protective spending, and the comparative state of other economies.

But voters will sense that it is too easy - a function not of serious fiscal restraint but of Australia’s extraordinary good luck in being a major supplier to the Chinese economic behemoth. Let’s be frank, this is what is pushing growth trends well above the international average. An OECD report released yesterday projected 3.3 per cent growth for Australia in 2010 and 3.6 per cent in 2011, compared to the OECD area as a whole with rates of 2.8 and 2.3 per cent respectively. It forecasts our jobless rate at just 4.9 per cent in 2011 compared to 8.1 per cent expected for the OECD.

Much of this is due to China’s insatiable appetite for our resources but it is also, to be fair, a solid vindication of the Government’s stimulus spending. Yet even here, there is a political downside.

While the Opposition won’t agree, it actually took some guts to splash out tens of billions on stimulus payments fresh from winning an election by claiming to be economic conservatives. Yes the big spending ate into the Budget big-time, but it also cost Labor some of its new-found economic management cred with voters. And as the 2010 election showed, they were not minded to reward the Government for its success.

The task facing Ms Gillard, Mr Swan and new Finance Minister, Penny Wong is to rebuild this credibility. And there is no time like the first budget after an election to do it. Just as they had to overspend in the crisis to jump-start confidence and buoy the mood, they may now need to go the other way by seriously cutting to entrench a new sense of fiscal discipline.

Access Economics Director, Chris Richardson is one urging them on. He says cuts could put downward pressure on interest rates, but warns they would need to be big and fast because fiscal policy is not that good at relieving interest rate pressure. There would be other benefits though.

``The best reason for doing something in the Budget is we’re wasting money,’’ he says.
He nominates industry welfare such as the Green Car Fund and the proposed ``cash for clunkers’’ scheme as candidates for the chop.

He also pins middle-class welfare arguing many payments cut out only when the family income is over $150,000.
``That’s just not tough enough, if you want to restrict the wealth payments to those who need it then you have to be tougher than that.’‘

Finally, he says tax breaks for high income individuals including generous treatment of superannuation, and FBT, is another ``a target-rich environment for saving money’‘.

John Howard ordered swingeing spending cuts in 1996. Indeed they were so severe the Canberra property market took a dive because so many public services jobs were cut. The austerity drive almost cost John Howard the 1998 election but even now he credits those tough decisions with setting him up both politically and economically in the longer term.

Julia Gillard take heed: even though the Budget is trending back to surplus, you need to show some extra grit economically - particularly as the Opposition will continue with its debt/deficit/waste campaigns.

On this front, Labor remains vulnerable first because its main initiative this term is the gargantuan $43 billion national broadband network (about which public doubts appear to be increasing). The Opposition strategy is based on re-positioning the NBN as the next school halls/ pink batts debacle and with that much money involved and Labor’s recent record, why not?

Second, as MYEFO and the OECD show, the economy is now nudging against full capacity - in other words, the risks have now swung to the upside: high inflation requiring ever higher interests rates. We know how voters will view that in 2012/13.

In short, the Government’s success in driving its political and economic bank accounts into credit in 2013, depend to a large degree on the courage it shows in its first Budget.

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32 comments

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    • Wayne Fehlhaber says:

      08:27am | 20/11/10

      Ironically , the resourses boom with China is lending the Gillard/Swan govt. economic credibility which is severely misplaced .  Just as Labor claimed the Howard/Costello govt.‘s economic credentials rested on the resourses boom.
      Labor’s weakness in allowing itself to be dragged off the economic priorities on to petty side issues will be it’s undoing . The Greeens radical plans and policies whilst in a position of power over the Gillard govt. will ultimately destroy Labor as sure as the sun rises.

    • The Badger says:

      11:38am | 21/11/10

      Howard/Costello economic credentials?
      You mean like selling telstra and hoarding the money, cutting health and education budgets and leaving the infrastructure of Australia a shambles?
      or perhaps you mean overtaxing Australians to create a surplus of money that was then distributed as middle and upper class welfare in an effort to buy votes?

    • Wayne Fehlhaber says:

      05:57pm | 21/11/10

      Badger :  Taxation in Australia was considerably reduced under the Howard/Costello govt. .  Labor’s debt retirement soaked up the bulk of the Telstra sale receipts and the balace invested in the Futures Fund.

      Incidently , can you point to any Labor infrastructure projects other than the BER Rip-off fiasco.  ?
      Badger , do your homework before keying. !  This govt. is far worse than the Rudd/ gillard govt. for which Rudd was knifed in the political back .  In fact , by comparison with the Whitlam disaster , this directionless mish mash of Gillard Labor/ Greens/ Independents will be historic for it’s mammoth scale of impotence .

    • nate says:

      01:43pm | 22/11/10

      “surplus of money that was then distributed as middle and upper class welfare in an effort to buy votes?”

      what about the borrowed money that was distributed by the Rudd/Gillard govt to DEAD people as well as australian citizens living overseas because they felt that giving money to dead people and expats would somehow stimulate the australian economy?

      I was living overseas for part of the howard/costello govt so maybe stuff happened in that period that I didn’t notice But labor’s failures so far have definitely trumped whatever failures howard/costello had done. I mean even if you look at everything from a neutral point of view, just about every single one of their plans have resulted in a miserable failure followed by the diverting attention by announcing something even bigger than their last failure or shifting the blame

    • persephone says:

      02:29pm | 22/11/10

      Wayne

      incorrect, the level of taxation (as a proportion of GDP, the usual way this is measured) reached record levels under Howard.

      This is something called a fact and is easily verifiable.

      Telstra was sold by the Howard government for something like a third of its true worth, which is not good economic management in anyone’s terms.

      Howard also did cute little accountancy tricks like selling buildings and then leasing them back, paying more in rent during the term of the lease than the building was sold for in the first place.

      Oh, and invested $100 million in a space centre at Christmas Island….which doesn’t seem to exist.

      As for infrastructure projects, I would have thought putting fibre optic cable throughout Tasmania was fairly major, let alone the massive expenditure on roads and railways, or the upgrading of irrigation systems, or the investment in various forms of clean energy projects.

      This site

      http://www.economicstimulusplan.gov.au/mycommunity/pages/default.aspx

      allows you to check out infrastructure spending in your own town.

    • Tator says:

      01:45pm | 23/11/10

      Persephone, you mean the Hawke Government in 86/87 where Tax receipts reached 26.1% of GDP, which is the highest percentage of tax to GDP recorded at Budget.gov.au in the 2010/11 budget historical data.  But if you average it out, Howard was higher slightly, but only due to the structural change of the GST which shifted the tax base from state based taxes like FID, BAD, stamp duties on mortgages to Federal based taxes and then gave all the revenue back to the states anyway in addition to the change in the way fuel excise was levied due to the the 1997 High Court decision in Ha v New South Wales (1997) 189 CLR 465 ruled that state franchise fees on tobacco were unconstitutional and, in doing so, cast doubt on the constitutionality of other state franchise fees. At the request of the States, the Australian government implemented safety net arrangements to effectively collect franchise fee revenue on behalf of the States. This revenue was collected though higher rates of excise and wholesale sales tax on the relevant products, and paid to the States. These payments were subsumed into The New Tax System package from 1 July 2000.

    • nosthow says:

      08:34am | 20/11/10

      Full steam ahead for the Gillard Labor government Mark even if a little constrained by the new paridigm. Not an easy task ahead but the good news for Labor is the Opposition are a ragged mob who are just coming to the realisation that the wonder boy Abbott has led them back to Opposition for another 3 years ! Oh yeah how sweet it is ! Of course with the likes of the nasty Scott Morrison mouthing anti asylum seeker/humanity platitudes daily the task to hold government is made a little easier.

    • Wayne Fehlhaber says:

      04:18pm | 20/11/10

      Nosthow :  Has it yet come to your noice that the Gillard Labor/Green/Independent wobbly propped up mish mash posing as a minority govt. has been hobbled to the point of achieving zilch. ?
      So in fact , the fullsteam ahead for Gillard amounts to another sputtering
      retrogade step for Australians.
      Very soon now , this teetering mess will fall with a resounding crash to a mighty cheer from a long sufferring electorate .
      Oh how sweet it will be !

    • tcb 24 x 7 says:

      04:49am | 21/11/10

      Wonder boy abbott beat gillard and labor 73 seats to 72 the 4 iditiots decided for australia.she is not the true leader , never forget that.
      Pathetic gillard and labor cant even protect our borders from oppurtunists and you want this WEAK mob to run the country.
      Ausrtralia will be worse under gillard,as she cannot make tough decisions, let alone the ones in the past,lucky howard left them money to play with, but not anymore now.

    • Shane From Melbourne says:

      08:39am | 20/11/10

      Hell, no Prime Minister since Keating has taken the tough decisions- remember compulsory superannuation, floating the dollar, dismantling tariffs? Howard’s legacy was the building of the middle class welfare state, subsidizing property price increases through the first home buyers grant. Rudd and Gillard’s legacy is years of drift. Hard to believe that it has been almost 15 years since Australia has had a decent Prime Minister willing to make the tough decisions…..

    • Tator says:

      11:57am | 22/11/10

      Actually, it was Hawke who was the PM who floated the dollar and began dismantling tarrifs, Keating did bring in Super but Howard attempted to reform industrial relations to improve flexibility but went two steps too far towards the employer with Workchoices after Keating took them two steps too far towards the employee with his unworkable unfair dismissal laws.  Howard also implemented the GST which changed the way consumption was taxed in addition to broadening the tax base and in the same move, the way the States were funded by the Federal Government which meant from 2005/06 every state was receiving more from GST revenue than they would have under the previous system.

    • Rosie says:

      08:57am | 20/11/10

      Why is it always the middle-class earners, those of us that bust our guts doing all that is right for the well-being of our families that are first to be affected when it comes to cuts???????

      My daughter, a single parent after losing her husband to cancer works damm hard for the big pay! “Big pay comes the big responsibility” She is financially independent and can easily support her two children with our help in taking care of the kids while she works. We do it without any finacial help from the Govt because we know she cannot do the job without our help.

      Julia Gillard became PM under a lot of controversy so it is a wonder we now have a “debt/deficit/waste” Govt. It will always be controversial all the way, the important issues will never get done because she will spend her time trying to justify why she should remain in power.

      We don’t want the NBN, our daughter & son don’t need the NBN to see that their children, ( Australia’s future generation ) have a good education and are employed in whatever chosen career they decide on just like their parents and grandparents. Like us, through their jobs can provide for their families.

      Spend the money on making the country’s education more effective for all Australian children to be given the best chance ever to be employed in the future. Effective teaching is more important than the big expensive school halls etc!

    • Steve_of_Cornubia says:

      04:57pm | 20/11/10

      I’m afraid that our current crop of Labor and ‘centre-right’ conservative parties will continue to use taxation and welfare to simply redistribute wealth, rather than provide incentives for people to work hard, get an education, and spend wisely. This is the case in most western nations, particularly here, the UK and Europe (even the USA under Obama).

      Welfare in particular has now become simply a means to ensure that people who can’t be bothered with further education or otherwise achieving promotion at work (or even, for that matter, working at all) to catch up with those who have bettered themselves through their own efforts.

      No amount of welfare will improve the economy, and taxation is a disincentive to work and so should be kept to an absolute minimum consistent with funding essential services. If any government wants to build a prosperous nation it should do all that it can to encourage its people to earn big dollars, help investors to build new businesses, suck in overseas entrepeneurs and thereby provide employment for all.

    • Steve Putnam says:

      08:58am | 21/11/10

      The NBN will revolutionize education in this country. The same applies to business and the delivery of medical services. The opposition’s plan is just plain 20th Century and not amenable to updates. Little wonder they’ve been pretty quiet about the specifics of it, preferring in true Abbott fashion to make ambit lies about the cost of the NBN. The reality is that there simply isn’t enough of a market for the private sector to want to do the job properly. Venture capital has never been the strong point of Australian corporate life anyway.
      The Howard government’s education policy was riddled with inequities. David Kemp’s absurd funding scheme gave already wealthy schools money for such things as rifle ranges, swimming pools and grandstands for its playing fields, while in the public sector there were instances of extension mathematics students being forced to share text books. More money was given to private schools than the tertiary education sector with the result that at one point Australia didn’t have a university rated in the top hundred! The BER, despite its faults, is an attempt to redress the balance and give Australia the education system we both believe it deserves.

    • Sven Gali says:

      10:19am | 21/11/10

      Please point to a single minute the Prime Minister has spent justifying remaining in power, Rosie. Sure there are still some Coalition supporters blubbing crocodile tears into their cornflakes for Kevin Rudd, but they just haven’t gotten over the fact that while they were furiously stabbing away at him daily, they lost their chance to finish him off. Where were they for Brendan Nelson and Malcolm Turnbull ?

    • Joan says:

      10:11am | 20/11/10

      2011- 2012 - The housing property bubble will pop right on Labor Gillard face…. the way it did in USA and Japan. Australian Treasury very nervous as reported in `Australian.` The result of Artiffcial stimulation-  since Howard started it will burst with a massive pop….1990 ...gave us the recession we had to have . 2000 the begining of artificial property stimulation 2010… Treasury warning of big bang - property bubble bust…... POP go property values - sink like Japanese and USA markets

    • Michael says:

      02:32pm | 20/11/10

      What utter rubbish! The background to the property “bubbles” in the USA and Japan (and Europe, Ireland, Greece, and a list of others) is massive national and personal debt combined with bad loan poicies from unregulated banks. The US and parts of Europe had close to 25% junk mortgages and the US has laws which allow people to walk from their mortgage without bankruptcy. All combined, it meant that massive mortgage defaults led to massive property price drops. In Australia, we have a growing demand for property, solid banks with very few bad debts and people are not able to walk from their mortgages. This is why we will not have the sort of “bubbles” the US and Japan have had without a depression to destroy the entire market.

    • Whisperer says:

      05:32am | 21/11/10

      I am with you Joan on this issue and my fear is that when commodity prices fall ,this great nation will become a basket case .Our political leaders whatever party are an absolute disgrace ,putting self interest above the people .The time has come when the people of Australia should drive our pollies absolutely MAD with complaints to electorate offices on a daily basis, maybe then they will get their bums into gear.

    • Catching up says:

      09:32am | 21/11/10

      Who is responsible for this bubble?  Surely, the blame lies with more people than PM Gillard.  I think we can look at a decade or more of mismanagement that bought about this situation.  PM Keating did try to bring to an end the problem by erasing negative gearing.  Even he had to back track on this action.

    • taiabada says:

      10:34am | 20/11/10

      Gillard’s downfall will come from her own intransigence.  E.g. the NBN business plan.  Can anyone explain to me why a report commissioned by the Government and paid for by we the people, whether 4 or 400 pages should be withheld from the Opposition, who have an equal duty to peruse, consider and understand the report ON OUR BEHALF.  Meanwhile the Government tries to gain some advantage, paper up the cracks, etc., before revealing the substance.
      It should be mandatory that such a report is available to both sides of the house, to ensure that informed and adequate debate takes place. 
      This one is going to bit her on that ample bum.
      Julia should get rid of her own three-word-slogan - “Three Word Slogan” - and start “Moving Forward” very quickly if she is to survive in her own party room.

    • Richard says:

      11:36am | 20/11/10

      Look, projecting a surplus in 3 years time is all well and good; but no-one, absolutely no-one knows what is going to happen in the meantime. 3 years is over 1000 days away , and something unpredictable will happen between now and then that renders this budget forecast for a surplus erroneous.

      Everyone thinks that the mining boom will continue on for the next 20 years as if its fiat accompli. Well, yes there is a good chance that it will, but it might not, and I don’t think its prudent to count chickens before they hatch.

      Therefore, I call upon the government to (finally) prove that they actually are fiscally responsible by balancing the budget NOW, not in 3 years time. Don’t lack courage Swan, balance the books TODAY. It didn’t take any courage to mail $900 cheques to every man, woman and corpse. I’ve yet to meet a voter who wasn’t stoked to receive free cash. No, what would really take courage would be to eliminate the deficit NOW, even at the risk of the economy contracting.

      A short, sharp recession I believe is a preferable alternative to a long, drawn out period of stagnation or stagflation. A lot of people don’t realise it, but recessions are actually economic medicine. They flush out all the malinvestment from an economy and rebalance it, making it lean and lithe and primed for fresh growth. Its like the bushfire that rages through the forest, preparing the way for green shoots of new growth to emerge.

      We’re in need of an economic realignment and re-harmonision. Too much capital has been invested in inflated residential properties and not enough capital has been invested in productive manufacturing or agricultural enterprises. We have to take some hard steps now to sort out our economy so that we are not taking the mining boom for granted and being held hostage to the autocratic whim of Chinese demand.

    • Steve Putnam says:

      06:37pm | 21/11/10

      The mining boom, sans a tax commensurate with its profitability, will indeed be a ‘fiat (sic) accompli’ though that’s probably not what you meant.
      Having got that off my chest, I am in agreement with you that there is over investment in real estate. People still see this as the quickest way to make a buck and action by government isn’t really going to change this.
      I would like to see the end to some of the more outlandish agricultural practices we have been going on with for a century or so. For instance why, in our arid climate, do we still grow rice for export? Ditto cotton.
      Without getting too starry-eyed, I think its fair to say we’re pretty innovative and have often come up with better ways of doing things. We used to make good stuff and I think can do again. The government should for this reason reintroduce tax breaks for companies investing in research and development to get secondary and tertiary industry happening again.
      Whatever happens, there will be no stopping China becoming the world’s largest economy and as such we will always be beholden to it to some extent.

    • Gregg says:

      11:55am | 20/11/10

      Hell Mark, where have you been the last few weeks for this thought of a featureless landscape being reality is somewhat some wishful thinking I’d reckon.
      The moving forward cartwheel on emissions trading can go anywhere and take higher services/product costs for all along for the ride, the mining super profits tax is hardly a done deal and not only are boats still coming, the suicides, lip stitching, hunger strikes and conflict in many detention centres including just recently Melbourne do not make putting 1600 fellas together in Northam look any better than what Northam residents feel it will be and of course the NBN is about to be shown for what it is and that’s the greatest public expenditure waste this nation has ever seen.

      In all likelihood there could well be either a new Labor leader and/or a new government come 2011 and so predictability is hardly the call.
      For sure we need some sound government, something we are a long long way from achieving and the recession that could quite easily become a global depression may not be too far from our doorstep.

      All the fast broadband that people will cast aside as a luxury will do no good for maintaining basics like water, food production and medical services at a time when global pressures may even see an acceleration in people smuggling.
      The current government has firmly set out the you are more than welcome agenda and so we should not at all be surprised if more and more people start hopping into boats from further afield, Africa for instance

      There is unpredictability in the moving forward down the Gillard paved road to that banana republic one of her predecessors spoke of and hopefully further unpredictability on how we achive change.

    • MickeyK says:

      12:25pm | 20/11/10

      @Joan, Ireland is another example. of what you fear. Ideally the government would do something to stop property prices rising for the next decade or so to try to bring them back into line with the long term value to income trend without the current bubble bursting, but I can’t see this happening.

    • Rick says:

      04:14pm | 20/11/10

      One of the more thoughtful articles on the political landscape I have read in a while.  The penny has finally dropped for the coalition that there will be no early changeover of government and no early election.  The government, barring something unforeseen, will run full term.  You are correct to say that at the end of the 3 years the runs will have to be on the board.  Gillard, in her negotiations with the Independents, showed her strong negotiating skills - exactly the skills that will be required to get things through the parliament during this term.  The electorate gave us a finely divided parliament - the parliamentarians have to make it work.  Those who wilflully seek to wreck it will pay a heavy price.

    • Theo Racle says:

      08:06pm | 20/11/10

      Seems to me the Gillard government should take a step back and see the wood for trees. Hard times are coming,put their excessive spend ups on the backburner and wait patiently to guide Australia through the second coming of the G.F.C. I have no facts to back my reasoning other than observing the lower end of the fiscal regime,people are doing it very tough,prices are escalating way beyond any official inflation figure,the last interest rate rise has pressured the camel,s back to the point of collapse. If you don,t believe me ,take a savage paycut and try to survive on it.

    • mickijo says:

      12:28pm | 21/11/10

      What about “grocery watch”? Wasn’t that supposed to do something about-er-watching groceries?

    • biff says:

      08:55pm | 20/11/10

      I’m sure PM Gillard will do whatever deputy PM Bob Brown wants her to do.

    • Sven Gali says:

      01:05pm | 21/11/10

      The Deputy Prime Minister is Wayne Swan, biff. You might want to check your information occasionally.

    • Aitch B says:

      06:59pm | 21/11/10

      @Sven Gali

      Quite correct…. Swan is the DPM but I think you’ll find that biff was commmenting more on the fact that Brown is pulling the strings in this quite pathetic puppet show.

      Conroy’s backdown from a 7 year confidentiality agreement to a 3 year one after a Green spat the dummy is evidence enough that this government is driven by political expediency and little (if anything) else.

    • Daniel says:

      09:30am | 21/11/10

      Lets see Gillard actually make some.

    • Matthew says:

      12:24pm | 22/11/10

      Anyone who voted labour or greens shouldn’t be whinging on here. Come on, you are stupid enough to believe what they tell you and then you blame someone else when labour fails to deliver time and time again. Pathetic.

 

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