The Roubini storm would change everything

If the latest predictions from 'Dr Doom' Nouriel Roubini are correct, the next federal government is set to inherit an economy that no sane politician would wish to govern.

Roubini, one of the few economists credited as having predicted the GFC, says 2013 will be a 'perfect storm' of economic calamities – in addition to the current European crisis, he expects that US tax hikes and spending cuts will return the US economy to recession, that China's economy will have a hard landing, plus there'll be slowing growth in emerging markets and a war with Iran. Happy days.

To understand the implications for the next federal government, which is likely to be formed late in 2013, it's important to re-examine the demise of the Rudd prime ministership.

Although the thumbnail history of Kevin Rudd's demise usually focuses on his backflip on "the greatest moral challenge of our time" - climate change policy - it's worth remembering that two other forces worked against Rudd.

The lesser of these two was the first version of the mining tax, the Resources Super Profits Tax, the announcement of which elicited a violent and well-funded backlash from the mining majors.

But an even bigger factor, which is usually overlooked because it was so all-encompassing, was the global financial crisis. Labor's 'gang of four', comprising Rudd, Wayne Swan, Julia Gillard and Lindsay Tanner, made historic decisions during the GFC based heavily on advice from then-Treasury Secretary Ken Henry, and got many of these big calls right.

But when Rudd's popularity plummeted in 2010 after the carbon pricing backflip, Labor's Right faction forces swung into action against a backdrop of great uncertainty in markets and with the personal wealth of Australians being ravaged by a weakening housing market and an equities market that flatlined for that entire year.

What's often overlooked is that Rudd's popularity in the opinion polls was no worse the John Howard's low point, or Keating's before that. It was the combination of low polling and chronic uncertainty stemming from the post-Lehman Bros turmoil that unseated Rudd – not just the former factor.

Both ALP supporters and many historians will conclude that Rudd was just unlucky - the 'bunker' mentality he developed during the intense heat of the GFC market turmoil may not have happened at all in times of bounty (such as characterised the last years of the Howard reign), and his famous expletive-laden outburst at staffers might have been more subdued.

We'll never know. But what is almost certain is that the nervousness of the trigger-happy 'faceless men' who so quickly shot Rudd down was inextricably linked to the turmoil of the time.

Which takes us back to Roubini's forecasts for next year. If Dr Doom gets it right twice, a late 2013 campaign will fought on very different terms to today's bitter fighting across the parliament.

Gillard's signal that she intends to run an anti-WorkChoices campaign (despite no such policy now existing) will gain greater significance. In a deteriorating jobs market, swing voters will find Labor's jobs-protecting message all the more beguiling (and Greens idealism all the more risky).

Abbott's plans to slash the federal budget so as to deliver fiscal surpluses without added revenue from the carbon and mining taxes will also take on a quite different patina – both sides will have to cut spending if there is a significant downturn just to keep the expenditure/GDP ratio hovering at its current level of around 24 per cent.

And neither side will have the fiscal fire-power that Kevin Rudd inherited from John Howard – zero federal debt, and a $22 billion slush fund that Howard didn't manage to give away, despite the generosity of the late Coalition government's middle-class welfare packages, before losing power.

Just for the sake of wild fantasy, let's imagine for a minute that a Labor government is returned in 2013. It will be carrying something like $150 billion in net debt, with gross debt threatening to break through its newly increased $300 billion cap. As Roubini's cataclysm unfolds, Labor will have few resources to help the jobless, to manage structural transformation in the economy, or even to carry on with ambitious public projects such as the NBN or state-owned or financed renewable energy projects. It will have to borrow more, not less, and the current commitment to budget surpluses will be junked overnight.

None of that's very likely, of course. Much more likely is that Abbott will cop the Roubini nightmare. His strategy will be founded on carping about the debt Labor left him to deal with (not much of a popularity winner), while jobs tumble and the unions grow stronger. All the while, Wayne Swan and new opposition leader Kevin Rudd will not miss a chance to compare their strong economic numbers with Abbott's dire figures - carefully avoiding any acknowledgement that it would be global forces, rather than any local decisions, that were mostly to blame.

That's if Roubini's right. Let's all, whatever our politics, hope that this time he's 'Dr Wrong'.