Illustration: Alan Moir
The Gillard government's overdue admission about the state of the budget presents an old problem wrapped in new clothes.
How does this administration sell its about-face on the surplus and survive the huge political impact of a third broken promise when it has so little capital in the credibility bank?
Not only has the Gillard administration been mugged by economic reality but it has suffered a fresh blow to its credibility by breaking another rolled-gold promise, just as happened with the carbon tax and the pokies plan.
At this time last year, Labor was conceding it didn't have the numbers to get the gambling reforms through Parliament. Breaking the promise on gambling reform was done in January, as the nation sank into happy daze.
Julia Gillard had promised she would legislate for mandatory pre-commitment technology to be installed on poker machines, as demanded by key independent Andrew Wilkie in return for his vote in the hung parliament. However, members of cabinet and caucus were aghast at the damage being done to Labor in its heartland by the backlash led by the powerful clubs industry.
It didn't matter if the campaign against the reforms was truthful or not, it was very effective in spooking some Labor MPs in marginal seats in NSW. Gillard went to Hobart to personally deliver the bad news to Wilkie. Then, like a good politician, she dressed up the broken promise as a positive.
The watered-down reforms were touted as doing ''more to tackle problem gambling than any Commonwealth government in Australia's history''.
This week it was becoming increasingly likely the PM would perform the same trick again, using the cover of holidays to break the surplus promise, hoping most Australians were more interested in spending some well-earned downtime with their loved ones.
It has been apparent for months, to those with eyes to see, that the political promise to deliver a surplus, even a wafer-thin one, could not be achieved.
The decline in revenue is not the fault of the government but a government would be at fault if it pursued a reckless political target, to the detriment of the nation. Turning a multibillion-dollar deficit into a small surplus in one year was a laudable but ambitious target.
The way it was to be achieved is the key. Economists have been warning for months about the dangers of a slash-and-burn approach to achieve the turnaround.
Cutting spending further would cost jobs and hurt business confidence, deepening the gloom in some parts of the economy and effectively leading to a further slowdown. In that scenario, the budget might scrape into surplus but workers would be sacked.
That would represent a pyrrhic victory for Labor because the government would be smashed at the election next year in punishment for its extreme foolishness.
With the PM on leave, it was left to Treasurer Wayne Swan to bring out the trash, to throw out the bad news close to Christmas.
He admits that now is not the time to cut deeper, despite his earlier rhetoric. Public servants are already facing the squeeze because of his decision to apply more pressure to agencies' budgets through the
so-called efficiency dividend. And just this week the government confirmed the shameful shift in aid funding to pay for asylum seekers, in its desperate pursuit of the budget surplus.
Until a few days ago, the government was trapped by its own rhetoric. The surplus promise was made because of Labor's obsession not to be painted with the same tar brush as the Whitlam and Keating governments.
Those administration are remembered for ground-breaking social policy advancements - Whitlam for Medicare, Keating for superannuation - but also for a remarkable lack of economic acumen. How else could you explain Keating's "gift" of a hidden multibillion-dollar deficit to incoming prime minister John Howard?
When Labor returned to power, Kevin Rudd steered Australia through the global financial crisis with the stimulus package, spending big time and putting the budget into deficit - because it was needed at the time. However, the Coalition had partial success in blackening this achievement by focusing only on the negatives.
Clearly that rattled Gillard, who became more determined to show Australians that she could break the stereotype about Labor, and lead an administration that was credible, responsible and economically literate. Hence the promise to heroically turn a huge deficit into a surplus in just one year.
About a year ago the chances of that happening were looking reasonably good as mining revenues boomed. In recent months, however, the downturn in community prices has hit hard.
The budget delivered last year was predicting a return to surplus in 2015-16. Therefore, Labor was overjoyed to be able to promise this year that it would bring the budget back into surplus "three years ahead of schedule".
In his budget speech this year - which seems like a lifetime ago now - Swan used a (slightly) catchy line to alert the nation when he set the surplus promise in concrete. "We'll be back in the black by 2012-13, on time, as promised," he told Parliament.
In July a confident PM bragged: "We saved jobs, stayed out of recession and got back to surplus." Er, no - two out of three ain't bad but the budget merely predicted a return to the black.
There are many such quotes for the Coalition to chant as it campaigns on yet another broken promise.
In recent months, as revenue dropped, the promise of a surplus morphed into vagueness. It became a commitment, a target, an aspiration.
This weekend, the Coalition is blaming Labor's years of "reckless, wasteful spending" for destroying the hope of a surplus. That sentiment will drive a renewed campaign by Tony Abbott for the election. His theme remains that the government cannot be trusted due to another broken promise.
Now it is up to Swan and Gillard to try to repair the damage and reframe the argument in their terms. However, given their lack of success in delivering a cohesive narrative, that will be extremely difficult. One factor on their side is that many voters will not care about the surplus, despite the humiliating backflip.
When the political battle is rejoined in February, the government must take voters with them on a positive journey to the election, if it hopes to put itself into a competitive position.
One pitfall on that road will be restraining the expectations of interest groups that believe giving up on a surplus means the way is now open for big spending programs. First cab off the rank will be the welfare sector, which has been running a vigorous campaign to increase the dole.
The budget must contain some carrots for the spring election, in addition to finding money for the National Disability Insurance Scheme and the Gonski education reforms. However the Coalition will question why new promises should be funded when the budget is in such bad health.
The change on the budget ensures that economic credibility remains a key theme for the election, which will end the political career of either Gillard or Abbott.
Twitter: rosspeakeCT
