Victoria's economy has gone cold, and neither the federal nor state government can do much to stop it without putting their budgets in deficit.
Ted Baillieu has the bigger problem. Victoria is copping the brunt of job losses and stagnant spending caused by the high dollar, excessive interest rates, and a range of other factors.
Victoria is now either in recession or close to it. Yesterday's figures show the state is losing 5000 jobs a month. Since April, 42,000 full-time jobs - one in 50 - have been wiped out.
Wednesday's figures showed total spending in Victoria shrank in the December quarter.
Our economy needs stimulus. But Tuesday's figures told us the state's revenue base has collapsed. And on Wednesday, Treasury secretary Martin Parkinson said the federal tax base had collapsed too.
Victorian Treasurer Kim Wells is facing a perfect storm. Job losses mean less payroll tax. Cautious consumers mean less GST. Falling house prices mean less stamp duty. Even gambling has stopped growing. It wasn't why Team Baillieu decided to scrap 3600 public service jobs, but it's a good reason to do it.
But to do it now risks making the state's downturn worse. In the '90s Victoria's unemployment rate peaked, not under Labor, but under the Kennett government, because of its job cuts. The lesson from that was: take your time and deliver the pain when it's most easily absorbed.
Wayne Swan has locked himself into a surplus in 2012-13. Now he has to deliver it in an economy already slowing and with company tax revenues flat, which requires even bigger spending cuts. That will add to unemployment, and it makes no economic sense.
Both treasurers should listen to International Monetary Fund chief Christine Lagarde: don't make things worse by cutting spending hard now, she says. Instead, deliver reforms that make your budget stronger over the medium and long term. Australia and Victoria have low debt levels. That gives them the flexibility to make their budgets fit the circumstances.
Baillieu and Wells have options. First, their staff cuts could be made a medium-term goal, to be implemented as the economy picks up. Second, they could turn up the tap of spending on productivity-enhancing transport infrastructure: road, rail, level crossings. And third, they should say a firm ''no'' to the inflexible budget rules proposed by the Vertigan inquiry. The state must be free to respond to the economic situation.
Swan, alas, has already bound his own hands, and will therefore inflict a contractionary budget on an economy needing stimulus. A bolder government than his would break its budget pledge, and tell us honestly why it matters more to keep the economy going than to balance the 2012-13 budget.
Instead, it would seize its chance to tackle the big long-term threat to the budget: the ageing population. The pension age should be raised to 70, not 67 - and start rising before the baby boomers retire, not after the horse has bolted.
