Politicians are like novelists. They usually find it's best to stick to a simple narrative if they want to be popular. Most enjoy telling a story in which they are the tough guy: tough on terrorism, tough on drugs, tough on crime and the causes of crime, and so on. They are always the hero who fights for the battlers, or, more recently, working families.
As soon as he became prime minister, Kevin Rudd dedicated himself to fighting inflation. So did the new Treasurer Wayne Swan who expressed his horror at inheriting an economy from the former Liberal Treasurer Peter Costello who had let the inflationary "genie out of the bottle". Naturally, Swan promised to do everything in his power to stuff the genie back in the bottle.
But Swan and Rudd are like novelists who are half way though writing the first chapter only to the find their narrative has developed a life of its own. Now they have to tell a more complicated story in which economic growth still has to fall to fight inflation. At the same time, they must stand ready to fight ferociously on behalf of voters who risk losing their job or their small businesses if the economy grinds to a halt.
The Reserve Bank of Australia's decision to lift official interest rates 12 times since May 2002 was meant to slow the economy to tame inflation. However, the impact has been magnified over the past year by the global credit crunch triggered by the reckless behaviour of US banks in bundling up dud home loans and flogging them off to equally irresponsible financial institutions around the world.
There's no compelling reason why Rudd and Swan can’t succeed with a changed political narrative, but it would help if they had more time to establish their economic credentials. In contrast, Costello's reputation as a good economic manager is the main political asset he would bring to the job of Opposition leader if he took over from the hapless Brendan Nelson.
But Costello was Treasurer while the good times rolled. Had the Coalition won the last election, he would now be facing the same problems as Swan and Rudd if there is a sharper than expected decline in economic growth. There is no obvious political narrative that Costello can develop to attack Rudd and Swan if very different economic circumstances apply. He can hardly claim that the good times would have kept rolling if he were still at the helm while a global credit crunch was superimposed on the RBA's interest rate rises.
Fortunately, Swan's first budget left Australia in pretty good shape if more stimulus is needed to reinforce the cuts to interest rates which the RBA is expected to commence within a couple of months. The surplus for 2007-08 was over $21 billion, most of which was stashed in three new funds to finance future spending on infrastructure, health and education. Almost $20 billion will be added from the 2008-09 surplus, assuming the projected growth in revenue from the resources boom is big enough to offsets reductions from other sectors as the economy slows.
The idea is to run down the capital in these funds as suitable projects arise. In addition, there are good reasons to reconfigure the existing Future Fund so it can achieve more worthwhile objectives than its current role of dealing with the complete non-problem of paying the pensions due after 2020 for a dwindling band of public servants who joined a now closed super fund. As the Australian Government Actuary has made clear, paying these pensions was never a problem. Using the Future Fund for this purpose does nothing to enhance national productivity. It would be much better to dedicate this fund's annual income of about $4 billion a year to increased spending on scientific research and education.
If economic growth really slows to a crawl, or goes into reverse, the Government will struggle to meet its election promise to maintain a budget surplus of 1.5 percent of gross national product. It shouldn't even try, if the RBA is cutting interest rates to stimulate growth.
The Opposition leader — be it Costello, Nelson, Malcolm Turnbull — would be silly to make a song and dance if the government abandons its target for the surplus. To argue the target must be met, regardless of changing circumstances, could leave the Opposition in favour of tightening the screws when they should be loosened.
There are plenty of politically popular ways the government could stimulate the economy if necessary. It could increase single rate pensions, unemployment benefits, living allowances for tertiary students, and raise the cut-off point for the maximum rate of family payments. It could bring forward planned spending on low emissions technologies and energy saving measures to help combat global warming.
This is the easy part of the new story Rudd and Swan will have to tell if the economy falls in a hole. The hard part will be convincing the rising number of voters who are laid off that there will be a happy ending, no matter how many twists and turns occur in a political narrative that began as a simple tale about stuffing a genie back in a bottle.
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