Surplus swansong leaves Labor in stormy waters

Throw out the bad news before Christmas. Hope that nobody notices. Who cares about a surplus anyway?

The economists have been saying it doesn’t matter, indeed that we would have been better off if the government had not locked itself into it.

But Wayne Swan’s ditching of the promise that the government first made in 2010 – in the budget when Kevin Rudd was still prime minister and the government expected to reap lots of loot from a robust mining tax – is a difficult and humiliating backflip.

It is a broken promise of the first order. True, in its October budget update and ever since, the government has put some qualification around its pledge. The $1.1 billion surplus was so thin there was always the risk it could not be produced.

A recent survey of economists found hardly any thought it would be delivered and of the rest, the expectation was for a deficit of $5 billion to $20 billion – still a hefty turnaround from last financial year’s deficit of nearly $44 billion.

Despite some recent softening-up for a possible change, the surplus promise is so long-standing and so often reiterated over the years that the impact of having to walk away from it is politically huge.

The opposition can crow. It has said all along that the government would never deliver a surplus and, if Labor loses the election, that (probably) will be true.

Swan cracked hardy. ”If the worst thing that people say is we got the economics right again but fell short on the politics, well I just say, so be it”, he said. He knows things don’t work like that. This is not an economic problem for the government – it is a political one. It goes to trust and credibility. Trust, or lack of it, is Gillard’s underlying vulnerability – notably, when it comes to policy, since she broke her word on the carbon tax.

There are so many quotes to throw back at the government. On December 7 Gillard said: ”Our last economic update had us at trend growth and that’s why the last economic update had us with a surplus. We are still determined to deliver the surplus.”

Leader of the House Anthony Albanese is looking particularly red-faced. On Sky on Sunday he was asked: ”If you had to walk through a door and your life depended on it, is the government going to deliver a surplus or is it going to fall into a small deficit in May?” He was unequivocal: ”Well, the government’s going to deliver a surplus. That’s our policy. That’s what we’ve been working towards.”

The broken promise on a surplus is rather different in nature from the ”no carbon tax” one – circumstances have changed – but they can easily be bundled together.

Tony Abbott was quick to link them: ”You just can’t trust this government to manage the economy. You just can’t trust this government to tell the truth.”

At his news conference, Swan was awkwardly reminded that in 2008 he had talked about a ”temporary” deficit, and there had been a deficit ever since. For good reasons, certainly, but words and pledges come back to haunt politicians.

Swan insists the government is doing fine in managing the economy. He says spending restraint will continue. It’s just that it would be counterproductive, threatening jobs, to try to fill what has become – on the latest figures released on Thursday – an even larger gaping revenue hole. ”In just four months, we’ve already seen the full hit to revenue that we were expecting for the whole year,” Swan said.

It is interesting the government decided to cut its losses now, rather than wait for more figures in the new year. Stephen Koukoulas, of Market Economics, a former economic adviser to Gillard, looking at the latest numbers before Swan’s announcement, judged that it remained ”a close-run thing whether the budget will be in small surplus or small deficit for 2012-13”. (Swan’s phrasing was equivocal – he said it was ”unlikely” there will be a surplus.)

If the government had decided to hang on and hope, it would have had to work like fury over Christmas to make savage cuts. It was running out of time to achieve results quickly enough. The nightmare scenario would have been for it to announce a round of unpopular savings, only to later find it had to admit it still couldn’t achieve a surplus.

One problem Swan will have is containing expectations that the way is now open for more spending. Without the discipline of the surplus target, all sorts of groups will be making demands. There will be pressure from the welfare lobby to give those on the dole a better deal, from the foreign aid lobby to restore the money diverted this week to spending on asylum seekers. Swan is adamant the government remains tough on the expenditure side.

But, of course, there will be big spending promises in the May budget, coming not long before the election. The government has said it will give firm commitments to the billions of dollars needed for the National Disability Insurance Scheme and the Gonski school funding. Swan insists these will be financed by changing priorities – in other words, there will be savings.

Every promise broken makes people more suspicious of future promises. When the government outlines the funding for the NDIS and Gonski, critics will question whether these promises will be delivered.

Both sides of politics know the debate over who will be the more responsible economic manager is vital, and this was reinforced by this week’sAge-Nielsen poll. Asked to choose the issue most important in how they would vote, 35 per cent selected the economy. There was quite a partisan difference; the economy was chosen by 27 per cent of Labor voters and 51 per cent of Coalition supporters. But in an election where the Labor government would survive only if it won seats in net terms, it must try to attract Coalition voters on their core issue.

”The economy” is significantly higher in people’s priorities than just before the 2007 election, when 25 per cent named it as their top issue. The current Nielsen poll did show a decline in those believing a 2012-13 surplus should be a high priority, falling from 53 per cent to a still high 49 per cent. Forty-five per cent said it was a low priority.

In moving to reposition itself from promising a surplus to convincing people that another deficit is the only responsible course, the government will be relying heavily on the weight of the experts who are saying this is the right thing to do.

The advocacy from the economists is something that the opposition will have to grapple with. At the moment Abbott is not changing his position that a Coalition government would deliver surpluses across its first-term budgets. But that is a holding position, based on the latest budget figures, and Abbott is calling on the government to release revised numbers ASAP.

The Coalition position will have to be driven by the new figures. It would be foolish to lock itself in if the numbers indicate an uncertain future. It too needs to present election promises, and does not want to have such a slash-and-burn approach that voters are frightened away.

For the Coalition, Thursday was all upside, surfing on the government’s problems. But with the budget goal posts shifted and an election fast approaching, a lot of attention will inevitably be on the opposition. It has to remember that while the politics are playing for it on this issue, it would quickly become vulnerable if it appeared to be getting the economics wrong.