Budget surplus promise paints Labor into a corner

THE federal Labor government has got itself into a bind. It has boldly declared it will return the budget to surplus by 2012-13, pretty well no matter what.

Once a government declares the natural disasters in Queensland are no excuse for failure, the moral argument to justify failure from other factors dissolves.

Yet economic indications are growing that hitting the false budget surplus benchmark is likely to become more and more difficult as the year rolls on.

On Monday, the Business Council of Australia warned that the mining boom might not deliver the cash funds previously thought. It was quoting from Access Economics data that suggested iron ore and coal prices could halve. The hole in the budget could be anywhere between $7.5 billion and $36bn.

Apart from highlighting the idiocy of budget surplus targets when the size of the forecast surplus is in single-digit billions, a drop in commodity prices would lead to further questioning of the yet-to-be legislated super-profits tax on the mining industry.

And it's a tax Julia Gillard has already "fixed" after taking over the leadership from Kevin Rudd, so problems with the new design are hers and can't be blamed on her now foreign affairs spokesman the way adjustments to health and the like can be.

The budget surplus benchmark is false because the reasons for achieving it have little to do with economics and everything to do with politics. Wayne Swan needs to convince voters on the eve of the next election that he is a sound economic manager.

The political aim is a belief the surplus will cause voters to forgive Labor for spending so much and botching a number of program deliveries, and contrast with an opposition that has a surprisingly questionable economic reputation for a conservative team.

The simplicity of the surplus objective has always struck me as too clever by half. Why would voters thank Swan for getting the budget back to equilibrium when he inherited it that way?

Voters forgave John Howard for a lot because he inherited "Beazley's black hole", as the Coalition labelled it. He won applause for his mining boom-fuelled budget surpluses because the budget was in deficit when he inherited it.

No doubt Labor supporters would froth at the mouth because the big difference is that Howard didn't have to face up to the revenue-sapping impact of the financial crisis, which is a fair point.

But that defence is an economic argument, not a political one.

Voters are unlikely to nuance their way through the different economic circumstances Howard and Gillard face any more than they are the government's misleading claims that it has instituted $80bn of "savings" since coming to power, even though half the savings are tax increases.

The government hasn't learnt the lessons from previous Labor governments, on which many of the senior parliamentary team served as political staffers, highlighting the step up from being a good staffer to a good politician: one is a functionary, the other should be a visionary.

Bob Hawke and Paul Keating won re-election after re-election burdened by budget deficits, soaring national debt and an opposition prepared to exploit difficulties. Labor won 13 years in office from 1983-96 because it showed a preparedness to reform while sticking to core Labor ideological goals for social justice. It tore itself from the union movement's shackles while using the unions to help deliver reforms. Only skilled politicians can achieve that kind of political outcome.

To emulate the micro-economic reform credentials of the last Labor government, the current one needs to take tax reform seriously and embrace the goal of adjusting the imbalance between state and commonwealth budget planning.

The aim of a budget surplus at any cost by 2012-13 is a conservative aim, and one that helps get conservatives re-elected. If a Labor government tries to do it as its key objective, the likelihood is that it either falls short of the goal, or if it hits the target it doesn't get the credit Labor thinks it deserves.

Labor confuses credit for budget surpluses with credit for sound economic management.

The later is achieved by not wasting money and not botching programs. More effort on those twin goals would be a more fruitful political (and economic) exercise for the government.