PM, Treasurer out of tune on policy

Inconsistent messaging was one of things that dragged Kevin Rudd down during his first stint as Prime Minister, and in the key area of fiscal policy it is emerging again, as the PM and his Treasurer, Chris Bowen seemingly sing from different song-sheets.

After successfully challenging Julia Gillard, Kevin Rudd said that the Coalition was plotting a fiscal austerity regime that was a cut and paste of the Cameron government's response to the global crisis in the United Kingdom.

Britain had endured a double-dip recession and a Coalition government would also "tip Australia into recession and bring about significant unemployment", he said.

The challenge here was how to cope with the end of "the China resources boom", he continued.

It would have "a dramatic effect on our terms of trade, a dramatic effect on living standards in the country, a dramatic effect also potentially on unemployment unless we have an effective counter-strategy".

Rudd isn't alone in thinking that the capacity of the non-resources economy to fill the gap created by a retreating resources boom is critical to the economy in the medium term.

The Reserve Bank has been discussing it for years, and has cut its cash rate to a record low of 2.75 per cent to try to help engineer a smooth transition.

Goldman Sachs' Australian economist, Tim Toohey, has said there is a 20 per cent chance that Australia will experience a recession, and Bank of America Merrill Lynch Australian economist Saul Eslake says it is a 25 per cent chance.

Reserve Bank governor Glenn Stevens did say on Wednesday that the importance of a strong commitment to "fiscal responsibility" would if anything increase in the medium term as governments looked for ways to deliver "initiatives that the community appears to want".

It's also true that until the Australian dollar's recent fall the central bank was fighting a lone battle with its cash rate to try to make the handover from the resources economy work.

There will be some in the central bank who think a bit more fiscal stimulus would help, as long as the government continues to aim for a surplus across the economic cycle.

Rudd continued his theme this week.

On Wednesday he told ABC's 7.30 that the task was to "maintain a strong economy and jobs growth now that the China resources boom has ended", and said his proposed debate with Tony Abbott could begin with Abbott's "chosen subjects - debt and deficit."

It all feeds speculation that a Rudd government if re-elected would not only run more expansionary fiscal policy than a Coalition government would, but run more expansionary policy than the Gillard government would have - and a fiscal shift would not necessarily be dependent on Rudd propelling Labor to an election win.

The budget for 2013-14 that Wayne Swan handed down in May is locked in by legislation now.

Even if Kevin Rudd extends the election date far enough for Parliament to return for a few days there will be next to no chance to push new legislation through.

But if Labor announces more expansive fiscal policies in the lead-up to the vote and the Coalition matches it in the heat of the campaign more fiscal stimulus and an accompanying blowout in Australia's deficit reduction timetable would be locked in.

The election result would be irrelevant, and the markets and the Reserve Bank would adjust their thinking accordingly: cash rate cuts, for example, would be considered less likely.

Possible policy changes that have not been batted away by Rudd include an early shift to carbon trading (a change that would save Australia's largest companies several billion dollars in carbon tax payments) and a restoration of cuts in university funding announced by the Gillard government to partly fund the so-called Gonski education packages.

But wait, there's more - or is it less?

Chris Bowen has replaced Wayne Swan as Treasurer, and he appears to be saying that a fiscal expansion is off the table.

Here's Bowen speaking:

"We stand by our fiscal strategy, which is to return to surplus over the economic cycle.

"Now, of course, we do that in a responsible way, we do that in response to emerging challenges and difficulties."

Perhaps that still dovetails with Rudd's comments: Labor might spend more now, and save more later to hit the May budget's target of a small surplus in 2015-16.

Another Bowen comment, that spending decisions have to be "within the existing fiscal envelope ... you'd only contemplate stimulus if growth was not normal, but it's close enough to trend for the fiscal rules to be appropriate" suggests however that despite Rudd's comments, the new Treasurer believes it is business as usual.

Expansion, or status quo? Difficult to say. It's early days. The new regime is still settling in. But mixed messaging on fiscal strategy needs to end soon.

mmaiden@fairfaxmedia.com.au