Wong right for budget surplus job

THE mid-year economic review reveals that returning the budget to surplus in three years will be more difficult than the government thought.

One of the reasons is the high Australian dollar, which has hit our export industries. While many economists were predicting a surge in the dollar's standing for some time, Treasury didn't, which is why the government has now had to rearrange its spending priorities. But as opposition treasury spokesman Joe Hockey told Sky News's Australian Agenda on Sunday: "If you want to deliver a surplus in three years' time, you have to over-prepare, not under-prepare."

In other words, plan to deliver larger budget surpluses than you might like. If the numbers contract, you still get to surplus.

If times ahead are better than anticipated, the extra money in the government's coffers can be used for whatever purpose is deemed most desirable (cash handouts, tax cuts, or even to start a sovereign wealth fund).

The debate in this country about the need to return to surplus is a purely political one. Our national government debt is only about 6 per cent of GDP, which means it is very small by international standards. Nevertheless, both major parties have signed on to the budget surplus mantra, meaning achieving it has to be done or else the voting public may decide failure to get there is a failure of economic management.

Selling economic management credentials based on Treasury forecasts is inherently risky. But that is exactly what Labor did at the last election. After all, how many times during the Howard-Costello years did the forecasts fail to meet up with the actual figures? Pretty well every time -- economics isn't an exact science and economic modelling certainly isn't.

At least when Treasury kept missing the mark during the Coalition's time in office it was because it was underestimating proceeds from the mining boom.

That's an easier failure of forecasting for a government to deal with than what Labor has had served up to it this time round.

Julia Gillard knows she must achieve the budget surplus as promised at the election in the years ahead, and on time, because if she doesn't any credibility she has left with the voting public will be shot to pieces.

That's one of the reasons she appointed Penny Wong as Finance Minister rather than one of the right-wing up-and-comers who was expected to get the job (for example, Chris Bowen).

Wong is nothing if not a pedant for detail and precision. She will be prepared to make the sort of cuts Lindsay Tanner never did. And she won't face the personality struggle when doing so that her predecessor did in terms of her relationship with Treasurer Wayne Swan.

The cuts started yesterday, to the tune of $3.5 billion, but that will probably be a drop in the ocean compared with the sort of cuts that may be needed in the years ahead, assuming revenue forecasts from new taxes like the mining tax end up failing to meet expectations.

Swan and Tanner couldn't stand each another, which made doing business as part of the gang of four hard for both men. It made agreeing on where to trim government fat even harder. The consequence: they didn't do nearly enough of it, hence the greater need to go into debt when the global financial crisis hit.

Swan and Tanner may have been correct when they identified that as a nation we entered the crisis in a better state than any other Western power.

But that had nothing to do with either man having had courage to cut spending during the first year Labor was in power, the time new governments traditionally take the axe to spending streams of the previous administration.

Had Bowen taken over the finance portfolio instead of Wong, he would have been torn between his own ambitions (he is a potential leader), the funding desires of a range of his right-wing colleagues on the front bench, and the needs of a prime minister whose future relies on a return to surplus as promised.

That adds up to Wong being the better choice for the job, one of the few good decisions Gillard has made since becoming PM.

Wong, based in the Senate, has no leadership ambitions, she proved that she is a tough negotiator during the emissions trading scheme debate and, most importantly, she wanted the job and the challenge that comes with it.

Not widely known is the fact that she quietly lobbied Gillard for the position ahead of polling day.

So while Swan continues to simply try to get by in the treasurer's job without too many commentators talking about how out of his depth he is, and while new Assistant Treasurer Bill Shorten uses his position to plan for his next promotion, Wong will deliver the bad news of funding cuts to colleagues, say no to excessive requests for more cash from ministers and keep a vigilant eye on the books each month.

Labor will succeed or fail this term based on how it approaches management of the books, and Wong welcomes the responsibility of that challenge (that, of course, is assuming it can actually discover an agenda and a philosophical yardstick for government -- if it can't, no quality of management of the finances will save Labor).

Hockey has no doubt it is a challenge Labor will not meet. He has said over and over again that he doesn't believe this Labor government, whatever the leadership configuration, will ever deliver a surplus budget. He said it again on the weekend. It is a good line, but predictions can be dangerous.

If Hockey is right, he can look forward to removing the word "shadow" from his shadow treasurer role. If, however, he is wrong, he will look negative, foolish and his credibility may take a hit. I wonder if he factored in Wong's elevation to the finance portfolio when making his prediction?