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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