Watch them squirm: Treasurer Joe Hockey, left, and Prime Minister Tony Abbott.

Watch them squirm: Treasurer Joe Hockey, left, and Prime Minister Tony Abbott. Photo: Andrew Meares

You have got to laugh. The Abbott government has got itself in a right muddle about deficits and the debt such that they are prepared to slap top income earners with an income tax surcharge. Then there is Tony Abbott’s signature policy of the paid parental leave scheme which will be funded by a 1.5 per cent levy placed squarely upon the big end of town. Of course, the rest of us, too, will feel the pain but it’s wonderful to see the top end of town get it.

The government's ideological godparents, those right-wing think tanks like the Institute of Public Affairs and the Centre for Independent Studies and bodies like the Australian Institute of Company Directors are apoplectic about the Coalition's intentions. This coming federal budget will be renowned as the one that struck against the interests of the establishment; all very weird for a Coalition government. Many will be annoyed that this government has not lived up to its pledge of no surprises.

It is, however, the natural pattern of Australian politics for conservative governments to engage in a dose of fiscal straightening.  To paraphrase a line from our rookie Treasurer Joe Hockey, cutting back expenditure runs in their DNA. This budget is set to see an income tax surcharge on those with incomes greater than $150,000.

Now there is talk of unfreezing the excise on petrol. Reference has been made to the last time a Coalition government resorted to a surcharge in 1978. Let’s hope Hockey does not imitate anything else from the 1978-9 federal budget because it was one of the most deflationary in Australia’s postwar history. Only the Fadden "horror budget" of 1952-53 was more contractionary.

 In 1978 another rookie treasurer, John Howard, brought down the budget with some aplomb. It was a classic of a budget in that not only did beer, spirits, and tobacco go up but even petrol as a consequence of the Fraser government adopting import parity pricing for oil. Moreover, Howard’s income tax surcharge of 1.5 per cent applied to everybody and it was levied for that financial year.

Howard’s budget was also infamous for introducing what became known as the newspaper boy tax. Children who earned income of more than $6 had to fill in an income statement and the family welfare allowance was reduced accordingly. Even public capital works were slashed by 10 per cent. Political commentator Michelle Grattan wrote of that budget "It was in every sense, a savage post-election Budget. It was all there … the toughness of the first year, the broken promises". Nothing’s really new, is it?

Then, like now, the national accounts had suffered from a shortfall in revenue. In a fit of fiscal machismo, Howard was hell-bent on two things. First reducing the then almost perennial budget deficit to come in below $3 billion and, more importantly, driving inflation out of the economy by putting the economy into deep freeze. Unemployment could go hang because the Fraser government had swallowed the Federal Treasury line that it was all entirely due to excessive level of real wages.

Howard’s budgetary strategy did not work; the deficit actually grew more than the targeted $2.8 billion and, get this, the income tax surcharge was actually extended for another six months till December 1979. A temporary levy can always be made elastic. One hopes Hockey and the Finance Minister Mathias Cormann know their political history. One suspects not.

So enjoy the spectacle and watch the Treasurer and Prime Minister squirm as the critics, some of them from their own constituency, wade in. We are not Greece; our public indebtedness is really quite modest but you would never believe it listening to this government. Still in election mode, they will pin the necessity of the fiscal medicine on Labor’s spendthrift ways. However, the electorate, which has enjoyed a 10-year boom and successive years of tax cuts, will resent the enforced austerity of next Tuesday's budget. Mr Abbott is going to discover just how unpleasant it is to be consistently unpopular. 

Alex Millmow teaches economics at Federation University, Ballarat.