Into The Battlefield

Sydney Morning Herald

Saturday December 1, 2007

Peter Hartcher and Andrew West

Kevin Rudd won the election at the worst possible time, with Australia in the midst of an inflation breakout and a possible recession, write Peter Hartcher and Andrew West.

The best possible way for the Rudd government to become a one-term wonder is for it to walk into the executive wing of Parliament House and fall straight down the elevator shaft of a recession.

It wouldn't be too good for the country, either. Rudd Labor has vanquished the second most tenacious leader Australia has known, but a series of demons, dragons and other dangers await the victors as they arrive in their ministerial suites.

Rudd has received the antipodean equivalent of the mandate of heaven, but it is also a licence to fail. To succeed, Rudd must show that he is the master of the union movement and not its slave; he needs to manage his legislative program through a Senate which he will not control; and he must manage the expectations that he has created that he will somehow address rising petrol prices, grocery prices and housing costs.

Of all these, however, economic disaster is the biggest and most pressing risk that the incoming government must avert. Australia has had 16 consecutive years of growth, already twice as long as a typical postwar expansion.

The ANZ bank's chief economist, Saul Eslake, puts the chances of recession in the next three years at about 33 per cent. The chief executive of the Australian Industry Group, Heather Ridout, remarks: "They aren't coming in at the easy part of the cycle; it's the difficult part of the cycle."

Only a few days after winning the election and even before its ministers have formally assumed office, the Rudd leadership group and the nation's top economic officials have already concurred on the greatest threat facing the economy and, therefore, the government - inflation.

Rudd takes power in the midst of a national inflation breakout. To contain it, the Reserve Bank is poised to continue raising interest rates for as far as anyone can see into the economic distance.

To make matters worse, Rudd is promising to deliver an inflationary blurt of $31 billion in tax cuts. "Rudd is walking into office with an inflationary tax-cut time bomb tied to his leg - he'll need to be careful it doesn't blow his foot off," observed a senior Labor figure.

His foot blown off, tumbling down an elevator shaft, Rudd would be in a most uncomfortable position.

In an election-eve interview with the Herald, Rudd described inflation as a "cancer" on ordinary families. His new treasurer, Wayne Swan, said yesterday: "Inflationary pressures have been allowed to build in our economy now for some time. Tackling this will be a serious challenge and top priority."

Swan and the Finance Minister, Lindsay Tanner, have ordered the senior officials of the public service to explore urgently measures to counter inflationary pressures.

Here are three.

First, the new government has launched a searching examination of spending in the federal budget. Its first budget, to be delivered in May, is set to be a tough one.

In the last days of the election campaign, Labor identified $10 billion in cuts over the next four years. Now it is seeking at least another $10 billion, according to informed officials. "Any program we find that's not working, that will be a target," said one.

This is more than Rudd's promise to put the "meat cleaver through administrative bloating". The search for savings includes entire programs, as well as their administration costs.

One Labor eminence privately is urging the incoming ministers to purge $30 billion to $40 billion from spending over the next four years. Officials suggested that this was too ambitious, yet pointed out that the Howard Swan and the Finance Minister, Lindsay Tanner, have ordered the senior officials of the public service to explore urgently measures to counter inflationary pressures.

Here are three.

First, the new government has launched a searching examination of spending in the federal budget. Its first budget, to be delivered in May, is set to be a tough one.

In the last days of the election campaign, Labor identified $10 billion in cuts over the next four years. Now it is seeking at least another $10 billion, according to informed officials. "Any program we find that's not working, that will be a target," said one.

This is more than Rudd's promise to put the "meat cleaver through administrative bloating". The search for savings includes entire programs, as well as their administration costs.

One Labor eminence privately is urging the incoming ministers to purge $30 billion to $40 billion from spending over the next four years. Officials suggested that this was too ambitious, yet pointed out that the Howard Government had not conducted a "razor-gang" scrutiny of spending since 1996-97. Current federal outlays are $230 billion a year. Total savings of $20 billion over four years would represent a cut of 2 per cent.

Lindsay Tanner, while declining to nominate any target figure, said yesterday: "Finding savings is always hard because there are very few that don't upset someone. So it's a real test of our commitment and our credentials. We need to have clear priorities and stronger discipline - this is very much the central focus of our economic approach."

The incoming ministers have asked the Treasury and the Department of Finance to draw up detailed guidelines for its razor gang - otherwise known as the Expenditure Review Committee of Cabinet. It will be one of the first decisions of the first meeting of the Rudd cabinet - to launch the razor gang.

This is not the heady sense of possibility that an idealistic new government might hope for. A senior figure in the Rudd inner circle acknowledges that:

"The biggest pole of debate will be internal - in all the areas where government spending has been most repressed, so in all the social policy areas of health, disabilities, aged care, indigenous policy, there will be demands for new spending.

"The attitude will be, 'Hey, we are now the government, let's spend money on things and look after people.' This will be a real, natural internal tension." Why tension? Because the Rudd leadership group will not accommodate these demands.

Determined to build a record as conservative economic managers, Rudd Labor will not countenance any big breakout of spending and will instead demand big cuts to outlays.

Why is it so important to find savings?

Because as the Reserve Bank was stepping on the economic brakes, the Howard Government was pressing down on the accelerator. Rudd is now seeking to help the Reserve Bank control inflation, not goad it to stamp on the brakes yet harder.

The central bank was dampening inflation by slowing demand in the economy through the mechanism of higher interest rates. The Government was pushing in the opposite direction by spending more, and handing out tax cuts. This only obliges the Reserve Bank to raise rates further. It was highly irresponsible.

Rudd Labor matched the Howard Government in the first phase of the election campaign in a deranged bidding war. Both leaders were promising to spend our money in a way that only increased the risk that the 16-year boom would end in bust. It was economic populism that assumed the electorate was too stupid to understand or too greedy to care.

Dramatically, Rudd called a halt at the Labor election campaign launch.

After Howard's pledge at his campaign launch to spend another $9.5 billion, it was Rudd's turn to cry "me too". Instead, Rudd called a stop to the bidding: "I have no intention today of repeating Mr Howard's irresponsible spending spree."

Surprisingly, this drew spirited applause from the Labor faithful at the party's campaign launch, perhaps the first time a politician has launched a campaign by promising to offer less. "Today I am saying loud and clear that this sort of reckless spending must stop," he said. And stop it he did. Rudd announced policies on education and alternative energy that, net of savings, were worth $2.3 billion over four years - a quarter the size of the Howard splurge.

The ANZ Bank's Saul Eslake thinks that Labor now needs to find further savings of $10 billion - for total savings of $20 billlion - as a bare minimum "just to offset the stimulatory effect of its tax cuts and other spending measures". If it can do this or better, it might be able to have the economic control levers - the Reserve Bank's monetary policy and the Federal Government's fiscal policy - working to complement each other rather than contradict each other.

© 2007 Sydney Morning Herald

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