Too clever by half and not clever enough

As an emblem of what is wrong with federal Labor you probably can't go past the 2012 Federal Budget.

Rather than a solid exercise in economic management delivering the benefits of economic growth to all Australians it is an exercise in spin, redistributing wealth it has gouged from productive sectors of the economy to groups it needs to win back to have a show at the next election.

It starts with a fairly successful attempt to reframe debate around whether the treasurer would achieve a surplus, rather than how large that surplus should be.

And there is no doubt that there should be a substantial surplus at this stage of the cycle, not the measly, and probably ephemeral, $1.5 Billion that the government is promising.

Even for an orthodox Keynesian, debt is not forever. Rather it is something that is used judiciously to smooth the business cycle.

The GFC is now four years gone, and Australia has experienced what most advanced economies would regard as reasonably robust growth for each of those years, so there is no excuse to be running a deficit now.

We should be piling up plunder in case it is needed for later, and for investment in the future.

Growth cannot occur without investment, and surpluses represent investment. They are not held in a box under the bed, but become available through financial intermediaries, to borrowers, most of whom are required to have a business case for their borrowing.

So not only do surpluses tend to lower borrowing rates, because there is more money available for lending, but they provide a positive stimulus to growth.

What the federal government has done through successive budgets is permanently ratchet up the fixed costs of running Australia, distributing the money for consumption today, decreasing what is available for investment and making it more likely that in the next downturn we will have to borrow even more just to meet our domestic obligations.

As the new government is finding in Queensland as they peruse the books of their profligate predecessor, this easily leads to the situation where expenditure exceeds the ability of taxpayers to pay for it and borrowing, rather than being undertaken for investment in the future, is used to permanently pay running costs leading to a financial vortex.

That there has been some debate amongst prominent market and economists and commentators as to whether it was worth even having a surplus shows just how successful the Wayne Swan has been in reframing perceptions.

Commentators are measuring this budget not against long term benchmarks, such as whether it meets the government's oft-stated desire to increase productivity, growth and hence the wealth available to all, but whether it meets a Treasurer-imposed and insignificant benchmark.

Indeed the benchmark may be worse than useless. The government missed its last year budget deficit of $23B by around $20B (we won't know the exact figure until later), so how good do you think this year's budget estimate really is.

Particularly as it forecasts growth in receipts of ten percent. They'd be the only business in town forecasting turnover growth in this range, and it follows over-optimism about growth in previous years, leading directly to the failure to meet their budget target last year by a factor of 100%.

From a political perspective this is the problem with Labor that voters have spotted – they are very good at promise, but lousy at delivery. That means that the measures in this budget designed to dig Labor out of political trouble are likely to fail.

The budget takes money from miners through the MRRT and from the community through the carbon tax, and gives it to 1.5M Australian families, some of whom are the "battlers" who gave John Howard his majorities, and more lately at a state level Barry O'Farrell and Campbell Newman theirs.

By playing Robin Hood Labor hopes to, if not win the next election, come a creditable second.

So how are these "battlers" likely to react to the largesse. Well they'll most probably spend it when it arrives – they have limited ability to save because living costs have been rising faster than incomes – and then they'll still see increases in the cost of utilities and living.

Will they net government receipts out against expenditures and worship at the shrine of the golden Swan, or will they be susceptible to the argument that the government is treating them like geese – taking money out of their pocket with one hand, and giving it back to them with the other and expecting them to be eternally grateful.

It's true that John Howard was a master of the art of the electoral bribe, but it worked for him because at the end of the day, things really were getting better, and there was a serious story of economic reform and advancement.

There was confidence that he would actually deliver, and that the bribe wasn't just to cover his shortcomings – it was a sort of dividend, paid for out of good economic management.

I doubt whether it will be the same with the politics of this budget. In 12 months time we will know that receipts fell short of estimates and expenditure exceeded them, and we'll be looking at another substantial deficit, with an election just down the track.

It will be far too late for misdirection and legerdemain then, and the government will wish it had gone down the path of fiscal rectitude, but all to no avail.