The ‘deficit’ wedge

In an earlier piece on The Political Sword The emerging Opposition strategy I wrote that one of Malcolm Turnbull’s strategies “...seems to be to try to anticipate Government moves and pre-empt them by stating what should be done, and occasionally what he would do.  The former is preferable because several options can be offered, some of which might hit the mark and make him look prescient, whereas the latter is more risky as it commits him.”

At the National Press Club on Monday, Turnbull said "Given the strong public finances Mr Rudd has inherited and the growth forecasts we are relying on for next year, Australians rightly regard the prospect of a deficit Budget next year as a failure in economic management - an admission that Mr Rudd could not maintain a strong economy and above all could not live within his means."

So there’s the wedge.  If the Government goes into deficit, Turnbull insists that will indicate failure.   Julie Bishop has been singing the same song, saying that with the forecasts the Government has made, there is no reason for it to go into a deficit.  This is a double wedge; she is seeking also to hoist the Government on its own forecast petard.

Access Economics released a report on Monday predicting the Budget will be in deficit by $1.1 billion next financial year and around $4.3 billion in each of the following two years.  Chris Richardson explained that this would be due to diminished revenues.  But in commenting on the prospect of a budget deficit, he insisted that going into deficit would be the appropriate thing to do, and that the Government should not shy away from doing so.  Other economists agree, including Stephen Koukoulas of TD Securities who said “The case for a substantial fiscal easing is strong, even if that means the Budget falls into deficit by 2 or even 3% of GDP.” and “It would be dumb to try to keep the Budget in surplus at a time of weak growth and rising unemployment.”

Yet despite that advice, which with his background he must understand, Turnbull is pressing on with his wedge to gain political advantage even if that is at the expense of good economic management.

Wayne Swan is backing Treasury forecasts: Swan sticks by surplus forecast  "The official forecasts of the Commonwealth are for modest growth and modest surpluses but there are always differences when there are private sector forecasters out there. We are projecting a modest surplus - Access is not. There is simply a difference in the forecasts when it comes to the revenue."  The message is similar from other ministers.  The Government is determined not to be wedged on this issue.  But the large deficit left by the previous Labor Government, which the Coalition exploited politically for its entire time in office and beyond, has become somewhat of a bogey for Labor.  This is not without good reason; Monday’s Newspoll figures showed that 56 per cent of those polled would be concerned if the Government were to fall into deficit due to further spending. [more]

Dennis Shanahan, in the 25 November issue of The Australian, in an article Push to put Labor in the red exposes the Coalition wedge and in his inimitable style heightens the threat by stating that “The Government is determined to be up-front about the financial crisis and its effect on the nation, which appears to be heading for a $40 billion budget hole over the coming years.”  He doesn’t define a ‘budget hole’ or say whether this term is the same as a deficit, nor does he define how many years he means by ‘coming years’.  Neither does he explain how he derived his ‘$40 billion budget hole’.  Perhaps he’s referring to Kevin Rudd’s statement about a worsening global economy in which $40 billion would be sucked out of government revenues, according to Treasury estimates. If this is Shanahan’s source of the $40 billion figure, his ‘budget hole’, to juxtapose it with talk of a budget deficit, which is what the whole article was about, shows either that he doesn’t understand the difference  between the loss of $40 billion in revenue and a budget deficit, or more likely that he is being disingenuous.

Taking Access Economics’ estimates, which refer to budget deficits for the next and subsequent fiscal years, about $1.1 billion for 2009/2010 and around $4.3 billion a year for the next two years, the total deficit would be less than $10 billion over the next three fiscal years, a far cry from Shanahan’s ‘$40 billion budget hole’, less than a quarter. 

Whatever his source, he seems intent with his $40 billion figure to paint a dire position for Labor, which of course may be his wishful thinking.  Moreover, he doesn’t mention anywhere in his article that economists are saying that going into deficit is what the nation may need to get it through the financial crisis.

Shanahan too sees the Turnbull play: “If there is a deficit, the Liberal leader can appear both prophetic and more reasonable than a Government in denial, as well as being able to trade on public concerns about a budget in the red.”

What this amounts to is an opportunistic ploy by the Opposition to wrong-foot and embarrass the Government about the much-talked-about deficit, and to paint it as incapable of sound economic management if it finally does go into deficit for the good of the nation.  That the Coalition’s wedge campaign flies in the face of sensible economic management in these troubled times is of no importance to them; political advantage and the wistful hope of winning the next election is all that counts.

Since his election to leadership Turnbull has posed as a financial guru, but he has gained no traction in two party preferred terms in the opinion polls, and in the latest Newspoll is 42 points behind Rudd in the preferred PM stakes, although not surprisingly he rates better than Brendon Nelson on personal approval.  The people don’t seem to be buying his rhetoric.  Writing in the 25 November issue of the AFR Laura Tingle reports that the Big Four banks have told Turnbull that his attacks on the Government’s handling of the bank deposit guarantee have been unhelpful and were undermining the finalization of the measure and its eventual effectiveness.  Bankers reprimanding an ex-banker, who should know better.  He's not getting traction even with his own kind.

Turnbull needs to be careful that his blatant opportunism doesn’t backfire.

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doghouse

26/11/2008AA, this tactic is very dangerous for the Government too. If Swan and Rudd don't tackle the issue head on they will end up being boxed in by Truffles. If they are so afraid of him, which they are, they will do anything to avoid giving him any oxygen. This potentially means that they (the gov) could end up cutting necessary spending in order to avoid a deficit, this in turn damages the Gov for not being able to take hard decisions, more spin, running from a fight, make the economy suffer or they will fudge the figures. All of which will encourage Truffles to try it on again, and confirm the government is not confident in its own abilities. This already evident by the way in which they give everything economic the Ken Henry (tm)tick of approval, except for the auto industry package. I will repost what Ross Gittins had to say about it too. ------------------------------------------------------------------ " What Wayne Swan doesn't seem to have realised is that, with all his inept dodging around the deficit-word, he's displaying Labor's inferiority complex for all to see. An old hand advised me years ago that, when you appear on television, it doesn't matter much what you say because it won't be remembered. The punters are always too busy trying to judge from your body language whether you're lying. Swan looks like he's a man with a guilty conscience who's trying to hide something. It's little wonder the press gallery keeps pressing him on the topic. Rudd boasts of his Government's "decisive" response to the crisis, but what we're getting on the deficit question is timidity. This is a government frightened by the populist nonsense being peddled by an unscrupulous Opposition. The stupidest part of it is, Swan is doing all he can to ensure that, when the inevitable happens, the Opposition, the media and the punters will see it as a failure of policy. The other thing I hope you've noticed is the way Rudd & Co are using the GFC to rewrite economic history. " http://business.smh.com.au/business/why-rudd-and-rees-are-rewriting-history-20081123-6ewa.html?page=1 ------------------------------------------------------------------------ This to me sums up very nicely my current frustration with the Rudd and Swan. It should be them who set the agenda, they have majority, they are riding high in the polls, they are the ones who are meant to be "decisive." --------------------------------------------------------------------------------------- "Yet despite that advice, which with his background he must understand, Turnbull is pressing on with his wedge to gain political advantage even if that is at the expense of good economic management." -------------------------------- AA, in all seriousness, who gives a f**k? Truffles is the opposition leader, why worry about what he does, we should worry about Swan and Rudd and what they do. The only way in which good economic management will be lost is if Swan and Rudd don't grow some cajones and nip this sort thing in the bud. But they lack the testicular fortitude and will most likely get wedged. Truffles 1 , Rudd 0, Australia......F**cked. ----------------------------------------------------------------------------------- "Turnbull needs to be careful that his blatant opportunism doesn’t backfire. " ------------------------------------------------------------------------------------ Why does Truffles need to worry? Nothing to lose, all to win, the ball is in the Governments court. Should he be careful not to make the Gov look like fools if they are indeed fools? Regards

Just Me

26/11/2008[quote]If Swan and Rudd don't tackle the issue head on they will end up being boxed in by Truffles. If they are so afraid of him, which they are, they will do anything to avoid giving him any oxygen.[/quote] A dubious bunch of claims.

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26/11/2008Doghouse, you'll be relieved by today's statement by Rudd in parliament and Swan's subsequent statements. The Government has wisely decided to bite the 'deficit' bullet. Rudd successfully avoided being wedged by Howard; he is determined not to be wedged by Turnbull. I suspect that the delay in conceding the possible need for a deficit was occasioned by Rudd's absence at APEC. A tactical decision of this magnitude would be unlikely before the key players could talk together in person and get the lines straight. If one can judge from today's announcement on the first day Rudd was back in the House, that discussion took place immediately after his return. It's easy to dismiss Turnbull as just the Opposition leader, and therefore we shouldn’t worry about him. But he's shown himself to be utterly unscrupulous, as Ross Gittins affirms. The Government knows its vulnerability to the 'deficit' bogey. Turnbull, Bishop, Hockey and many other Coalition members at doorstops have been loudly promoting the deficit story all day. Turnbull is now saying it would be 'economic laziness' for the Government to go into deficit. He said that Australian voters would regard any deficit as a failure in economic management and he was not about to offer a [quote]"leave pass to have lazy economic management and run the budget into deficit."[/quote] He accused the Government of seeking a leave pass to abandon fiscal discipline, and, rubbing in past deficits, said [quote]"Experience and history tell us that Labor deficits are never temporary. The last Labor deficit lasted for six years. It only came to an end with the election of a coalition government."[/quote] Rational people, economists and journalists all know this is 'wedge' talk, not rational economics, but how many will come out and say so? So far we have only the factual reports; maybe tomorrow journalists will call this for what it is. But I'm not holding my breath.

doghouse

27/11/2008AA, yes I was relieved! I had a good laugh with the use of the word "Temporary." You are probably right about the timing too. There seemed to be a consensus amongst economists which to me seemed like the perfect opportunity to thump Trfuffles. It seems that Costello's legacy is to have embedded in the mind of the community a rather stupid Surplus = Good, Deficit = Bad, way of thinking with no consideration for the context in which we are in. It was good to Truffles being tackled head on in parliament and I sometimes wonder if he tells himself "I am not a sellout", "I am not a sellout", "I am not a sellout" .............. With all the mud he is flinging some is bound to splash back. As for the media, the less said the better. The Oz, deserves to be called the Opposition Organ, or something along those lines. Lets hope that the deficit will be spent on worthwhile projects.

Rx

27/11/2008I don't believe for a moment that an inferiority complex over deficits is in order. But if they're to be assigned, let both sides step up to accept. Howard ran deficits as Treasurer (at a greater proportion of GDP than Hawke-Keating). As PM ran a deficit as recently as 2001-2002.

doghouse

27/11/2008"............let both sides step up to accept." And pigs might fly ;-)

Rx

27/11/2008Doghouse I hope to see Labor point it out then, that the Liberals ran in deficit, making the point that conditions in 2001 were nothing like today.

Rx

27/11/2008... Nothing like as serious, I mean.
How many oranges do I have if I have 3 oranges and take ONE away?