Tuesday, May 8, 2012

Swan's song to be in the key of austerity

ON SUNDAY, the Greeks had their say on austerity budgets. In 2009, 78 per cent voted for Pasok (Labor) or New Democracy (Liberals). Now the two are in coalition, and on Sunday, their combined vote fell to 33 per cent. Some swing: 45 per cent.

But austerity there will be: we will find out some of that tonight, some in the days and weeks ahead. And if Labor is not already in enough electoral strife, tonight's budget is a big gamble, with the potential to put it in even deeper strife.

To put it simply, this budget aims to turn a deficit of $40 billion or so this financial year into a surplus of $1 billion or so next year at a time when, other than mining, the economy is going either sideways or down.

The government has been releasing good news before the budget, to make sure it gets noticed. But the bottom line is that in 2012-13, the government will pull more than $40 billion out of Australia's economy, either by spending less, taxing more, or both.

It doesn't have to do that. There is no pressure from markets or voters for Australia to run a budget surplus. Money is flooding in to buy government bonds. And an Essential Research poll found just 12 per cent of us want to get the budget into surplus in 2012-13.

But the government had promised before the 2010 election that the budget would be in surplus in 2012-13. At the time it thought the economy would be growing at 4 per cent by now and adding 250,000 jobs a year.

Sadly, that was another forecast that went wrong. But after Julia Gillard has taken so much flak for breaking her promise on the carbon tax, Labor decided the budget had to go into a surplus in 2012-13, whatever the economic cost.

The outgoing Greek government made a similar choice, under duress from its European partners. Greece has 24 per cent unemployment and an economy that has shrunk 20 per cent in four years. Yet the budget deal imposed by the EU requires Greece in 2013 to run a sizeable "primary" surplus that is, a surplus of revenue over all spending except interest bills.

That will require huge budget cuts. So two-thirds of Greeks voted for parties to the left and right of the big two, in protest. Since the far left and far right can't agree, the centre will probably keep governing but will demand changes to the deal.

So will France, where Socialist Francois Hollande dethroned President Nicolas Sarkozy, after campaigning to replace deficit reduction with growth as Europe's central goal. "Europe is watching us," he said. "Austerity isn't inevitable. My mission now is to give European construction a growth dimension."

It was a similar story even in Germany, Europe's success story. In the northern state of Schleswig-Holstein, Chancellor Angela Merkel's coalition was swept from power in a swing of 7.5 per cent: the third state it has lost in a year or so.

In Europe, austerity is going out. In Australia, it's coming in.

Don't worry, the Treasurer tells us: the budget forecasts that even with $40 billion taken out of the economy, we'll still grow by 3.25 per cent. Yes, but the last accurate budget forecast was in 2007. And the last time he forecast growth of 3.25 per cent, we got just 2 per cent. If that happens this time, it will mean boom in outback mines offset by recession in the south-east. That is the risk tonight.