Fighting strategy may need miracle

THIS budget is a portrait of an optimist in the middle of a nightmare.

The world faces its worst economic contraction since the Great Depression but Wayne Swan is a convinced optimist who has produced a budget for optimists.

If Australia survives the current global recession delivering only the modest savings identified yesterday, then miracle will be a better label.

The budget strategy is strong on fiscal stimulus, moderate on medium-term structural savings, confident that Australia will survive better than other nations and grim in its depiction of the long night of high unemployment, deficits and debt that will forever define the Rudd Government.

This is a fighting document infused with faith in Australia's economic resilience. It is also an authentic Labor budget - branded by its stimulus, its new deal for pensioners, its paid parental leave and means-testing and benefit-trimming for high-income earners.

Its linchpin is the third forecast year, 2010-11, predicting recovery for Rudd's re-election campaign but coinciding with a jobless peak of 8.5 per cent, significantly below the early-1990s Keating recession. This assumes the forecasts are not again derailed by another global setback.

But Labor has fired nearly all its ammunition. Its big front-end stimulus packages mean spending must be severely constrained down the track when recovery starts. If Labor is re-elected, the second term will become the horror years. On these figures, there is almost zero capacity for new 2010 election-year promises.

Offering a mythic narrative, the Treasurer declared that Australians were "too strong, too resilient and too united" to be overwhelmed by the "brutal, uncompromising" intrusion of the worst global recession since the 1930s.

The heart of the budget is another stimulus geared to nation-building, a $22 billion investment in roads, rail, ports, education, broadband and clean energy. The message is that Labor's past stimulus has saved Australia from a contraction "four times bigger" and that only Labor's stimulus can "withstand the worst the world can throw at us". The plan is decisive action in the teeth of the downturn; the budget stimulus will boost GDP by 0.75 per cent next year.

The immediate politics will become a brawl over the savings measures designed to invest credibility into Swan's projection of a return to surplus in 2015-16.

The attack on so-called middle-class welfare has been surgical and logical but limited. Predictions of a horror budget were wrong. Yet it will test the entitlement mentality in Australia's psychology that will demand more concessions before the budget returns to surplus.

The $78 billion turnaround in the budget deficit testifies to the greatest fiscal reversal in Australia's history.

Yet net debt is projected to stabilise at a modest 14 per cent of GDP in 2013-14. The Coalition will conduct a scare campaign about debt, yet figures show Australia's position is benign compared with most other nations.

Meanwhile, Treasury has produced a small time bomb for the Coalition. It says that during the Howard years, the structural budget balance deteriorated from 2002-03 and moved into structural deficit in 2006-07. In short, the Coalition spent too much of the terms of trade boom. The Coalition, of course, has the perfect answer: it gifted Kevin Rudd with zero public debt, the perfect prize before the great recession.