Prime Minister Kevin Rudd has pledged further sweeping cuts to Government spending and the public service to deliver a budget surplus of at least $16 billion, in a desperate bid to pin back inflation.
Signalling it will be an extraordinarily tough first budget on May 13, Mr Rudd will tell business leaders in Perth today that he plans to maintain a budget surplus of 1.5 per cent of GDP this year.
This is half as much again as the 1 per cent budget surplus of about $11billion maintained under the former Coalition government and means another $5billion, at least, will need to be shaved from existing spending and services.
Mr Rudd will warn that Labor's "razor gang" will wield a meat axe as it examines the nation's finances "department by department, program by program, line by line" to identify savings on top of the $10billion in spending cuts already identified from forward estimates during the election campaign.
During the late stages of the election campaign, Labor promised a $1.5billion cut in public service expenditure in the form of an increased efficiency dividend which it believed would not result in redundancies, but Mr Rudd's speech is understood to contain no such guarantees.
The speech comes after the precariousness of the national economy was made clear to Mr Rudd and his Treasurer, Wayne Swan, in a meeting with Treasury head Ken Henry and Reserve Bank governor Glenn Stevens.
The central bank has given the Government a clear indication it will raise official interest rates again if core inflation proves to be high in data to be issued on Wednesday.
Mr Rudd and Mr Swan left Tuesday's meeting with Mr Stevens reportedly "ashen-faced" and declaring that interest rates were under direct threat and they would do all they could to restrain government spending.
Treasury has told Mr Swan it has increased its inflation forecasts in its pre-election Mid-Year Review, but has not substantially changed its broader economic outlook, suggesting it is more worried about inflation than a worldwide slowdown or financial turmoil.
In London at the weekend, Mr Stevens mused that if the RBA did not act against inflation when it knew it was rising, it might itself cause a crisis.
The Government has conceded a further immediate rate rise will be difficult to avoid when the RBA next meets on February 5.
In his speech today, Mr Rudd will lay blame for Australia's current economic woes on "conflicting economic currents", including a slowing US and global economy, the trade boom in the Asia-Pacific and domestic inflationary pressures.
He is hoping his ambitious first budget can ward off future hardship for Australian home owners after an election campaign in which he promised responsible economic management and his preparedness to take hard decisions.
He blames the Howard-Costello government for presiding over an unprecedented boom, but failing to make critical investments in skills and infrastructure, and allowing inflationary pressures to build.
"The inflation challenge we face today is very much the Liberals parting gift to the Australian economy," according to Mr Rudd, who now believes the economy is ill-prepared to deal with the demand surge flowing from the trade boom.
The first step to reining in inflation would be to embark on "a hard-line approach to fiscal discipline aiming for a budget surplus of at least 1.5 per cent of GDP in 2008-09, provided growth prospects remain as currently anticipated".
A full review of spending beyond the razor gang's $10billion in already identified savings was urgently required but would not be easy, he said. Mr Rudd is also conscious of the need to ensure the "quality" of government spending as well as the quantity.
Other aspects of Labor's five-point plan to fight inflation to be outlined today include encouraging private savings, tackling chronic skill shortages in the economy, providing national leadership to tackle infrastructure bottlenecks, providing practical ways of helping people re-enter the workforce, and removing disincentives to working in order to lift the country's workforce participation rates.
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