After Labor’s purge, now for the budget

Labor's civil war appears to be over, with the pro-reform, anti-union forces vanquished. It makes fiscal restraint in May's budget an unlikely prospect.

The federal budget in seven weeks time will be the Labor Party’s last one for quite a while. It means last week’s events at the top of the ALP acquire special significance.
What seems to have happened last week is that the anti-union, pro-reform forces with the Parliamentary Labor Party, led by Kevin Rudd, were purged once and for all. Surprisingly they included two former ACTU presidents, Martin Ferguson and Simon Crean, and an assistant secretary of the ACTU, Richard Marles.
Unfortunately for those trying to reform the party, their front man, Kevin Rudd, was by all accounts an unpleasant and arrogant leader who couldn’t command the loyalty of those whom he led, and an obsessive seeker of revenge.
If Rudd had been a better leader or even a nicer bloke and/or more loyal to the person who replaced him as leader – as Malcolm Turnbull has been – things might have been different. But the comprehensive crushing of Rudd by Julia Gillard last week appears to formally end three years of soul-searching by the ALP about its relationship with the union movement. The 2010 National Review of the ALP by Bob Carr, Steve Bracks and John Faulkner, recommending more say for grass roots members, has already been quietly shelved.

In the context of the budget, Martin Ferguson’s plaintive call, on his way to the backbench, for the ALP to cease “class warfare rhetoric” is especially pointed.
Treasurer Wayne Swan goes into what he knows will be the ALP’s last budget for years with cabinet resistance against “class warfare” – code for higher taxation of business and superannuation – reduced to a ghostly echo, with a resurgent union wing of the party, a $15 billion structural deficit and some big “Labor” programs to fund. And on top of all that, it’s an election year. It really is a scary prospect.
Australia has endured poor government and poor budgets for most of the past 10 years, from both sides of politics. As Deloitte Access Economics puts it, “our fiscal policy was to spend in the good times, and then to spend in the bad times".
Is the 2013 budget likely to reverse that? Hardly.
In particular it is difficult not to be fearful for self-managed superannuation, so hated by the union-controlled industry super funds. It will be hard for Wayne Swan to attack SMSFs without also attacking the industry funds, and that might save them. But if he can find a way to tax or control them separately, he probably will.
Businesses will be bracing themselves for more tax increases as well. Certainly the call earlier this month from the Business Council of Australia for an “independent review of the size and scope of government and its approach to spending, not ad hoc new taxes and revenue grabs, which will harm growth”, is very unlikely to be heeded.
An analysis of the budget by Deloitte Access Economics, included with the BCA’s budget submission, made the important point that “the best proxy for the underlying health of Australia’s federal budget is no longer unemployment – it is now coal and iron ore prices”.
The change occurred in 2003, from whence there has been a “striking” lift in national prosperity as a result of a lift in the terms of trade – in particular higher iron ore and coal prices. That led to a fundamental improvement in government revenue from a number of sources, and decoupled the budget from the unemployment rate.
Nevertheless, thanks to a decade of poor government starting in 2003 – of increasing public service numbers and welfare handouts – we have a structural deficit of about $15 billion at a time when iron ore and coal prices are likely to fall as China’s economic growth slows.
A former public servant told me last week that the size of the Commonwealth public service fell by 26,000 between 1996 and 2000, and then increased by 54,000 in the final years of the Howard/Costello government.
In addition to this medium term problem, Federal Treasury’s series of 'Intergenerational Reports' have spelt out the long term problems that the budget will face because of the ageing of the population and the rapid growth in health costs.
So as Wayne Swan prepares his sixth and final budget is, the question is whether it will be one for the nation, or one for the ALP’s class warriors, who have now emerged victorious from three years of debate and division within the party.
My money is on the latter, but I hope I lose the bet.

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