Abbott's slash-and-burn budget bet

The Coalition's promise to slash budget expenditure and reduce taxes at the same time is a sellable position, but in economic terms it's one hell of a punt.

After months of point scoring it was some relief this week to hear both the prime minister and Opposition leader outlining something like a vision for Australia.

Tony Abbott in particular gave us a bit more policy detail (we know most of Labor's policy directions already) and further dug the Coalition into the kind of public policy position that US and European thinkers have discussed for a couple of years now as 'expansionary austerity'.

Abbott is under pressure to match Labor's tax breaks and said in his Canberra Press Club speech on Tuesday that we'd have the full details of these well in advance of the election – just not yet.

That's a shame, because they really are key to assessing the viability of the Abbott agenda. The Coalition took "$50 billion" in budget savings to the last election, but is now required to stretch that out to something like $70 billion so as to be able to deliver tax cuts without the additional revenue streams flowing from the carbon tax and mining tax.

There's little doubt that's achievable – you just need a sharp knife – and the Coalition is most likely winning points with voters by promising to shrink the public service by 12,000 jobs to help hit that target.

But slashing the expenditure side of the budget, and reducing taxes at the same time, is a massive punt – a similar bet to that made by UK Prime Minister David Cameron who said at last year's World Economic Forum in Davos: "Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong... You cannot put off the first in order to promote the second.”

Of course Britain's debt-and-deficit position is several times worse than ours. But the same principle underlies the Coalition vision outlined this week. Abbott spoke of 'aspirational' public spending goals – adding dental work to Medicare and funding a national disability insurance scheme – but said neither could be paid for until Australia returns to "strong surpluses".

In other word, Keynes be damned. An Abbott government won't borrow to spend even in a downturn.

That leaves any extension of the Automotive Transformation Scheme ruled out, despite some strong support for additional spending in this area from the likes of Ian Macfarlane and Barnaby Joyce.

It also presumably rules out the additional vocational education and training funding announced by Julia Gillard yesterday, which Workplace Relations Minister Bill Shorten said last night will help kick-start "elaborately transformed manufacturing" in Australia. Perhaps instead of cars we can make something more elaborate – spaceships?

So there are two very clear paths ahead – a fairly conventional Keynsian roadmap in which public spending, debt and deficit are only slowly reduced so as to help the economy adjust to straitened economic times; and an 'expansionary austerity' program, as the Atlantic nations call it, that will kick-start economic growth by invigorating entrepreneurialism (through tax cuts and less red tape) and private-sector confidence generally.

Both messages are quite sellable to the voting public, but Abbott's measured and less 'negative' performance at the Press Club this week suggest he will win that contest – particularly with the government on the back foot over the Craig Thomson affair, the ever-present shadow of a Rudd leadership challenge, and the lingering whiff of deviousness after the Australia Day tent embassy fiasco.

But sellability and sense are not the same thing, and readers of Paul Krugman's column in The New York Times might find reason to be nervous at a potential government of Australia picking up a policy platform that just hasn't worked elsewhere.

Krugman wrote two days ago that: "...Britain, in particular, was supposed to be a showcase for 'expansionary austerity,' the notion that instead of increasing government spending to fight recessions, you should slash spending instead – and that this would lead to faster economic growth... influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

"[recently deceased US columnist] David Broder, who virtually embodied conventional wisdom, praised Cameron for his boldness, and in particular for 'brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.' He then called on President Obama to 'do a Cameron'...

"Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr Obama did not, in fact, do a Cameron."

Every new opinion poll suggests that Australia will also 'do a Cameron' under Tony Abbott. And who knows, our fairly unique position in the global economy might mean this is one of the few places such a strategy can work.

But this does look like a hell of a punt – a bit like asking Australians, Dirty Harry style: "Do ya feel lucky, punk. Well do ya?"

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