This week highlighted how economic policy has been trapped by a tainted parliament

Wayne Swan

DESPITE its fiscal merits and "return-to-surplus" Wayne Swan's budget strategy is unlikely to win the clean political oxygen it needs to secure even a modest turnaround in Labor's fortunes.

For Labor, the minority government parliament has now become political poison. The trap is diabolical -- the government's survival depends on tainted numbers such as Craig Thomson and Peter Slipper, yet such transparency ruins the government's integrity on a daily basis.

Tony Abbott's reply to the budget was an exercise in political contempt for Labor. Looking comfortable and in control, Abbott's speech was about values first and the economy second. His real attack was on Julia Gillard's integrity and judgment.

With Gillard and Swan branding their budget "Labor to its bootstraps" based on its fiscal redistributions, Abbott went on to the offensive. His speech put the full Labor tragedy on display. If Labor's leaders want a campaign based on values then Abbott will oblige them with lethal rhetoric derived from Labor's own actions.

Invoking his working-class grandparents, quoting Ben Chifley and proclaiming his affinity with Labor voters, Abbott said Labor stood for only one value: staying in office, and that the party should ditch Gillard before it "dies of shame".

Abbott's speech reveals the confidence of a leader calling the shots -- he feels no compelling electoral pressure to define an alternative economic framework beyond invoking the "sustained surpluses" of the Howard era (of which he was part) and pledging to make wealth creation as vital a priority as wealth redistribution.

His sole new pledge, to revive the teaching of foreign and Asian languages in schools, oozes with contempt for Labor, with Abbott seizing a Labor perennial where, yet again, its results have not matched expectations.

At week's end even the two staunch pro-Labor independents, Rob Oakeshott and Tony Windsor, signalled their concerns about ongoing support for Thomson. It is impossible to predict how this will play out. Labor's ability to complete its term is not assured and the further erosion of its vote from the Thomson affair is guaranteed.

There is much obfuscation over the Thomson issue. Abbott is motivated by his quest for an election, Gillard by her survival instinct. The parliament must confront the issue honestly, not engage in a surrogate debate about suspending Thomson when the real issue is terminating the government.

The independents are now trapped. They cannot escape their responsibility: they must decide whether a government relying on Thomson's vote no longer warrants their support on integrity grounds or, alternatively, re-commit to Labor, thereby becoming tainted figures that sustain a tainted government. For people who parade their political integrity, the independents face some difficult decisions.

For Abbott, Thomson is an endless political gift, a trade union Labor MP who, according to the Fair Work Australia report, misused upwards of $500,000 on personal indulgences and getting himself into parliament, the perfect symbol of the collapse in Labor integrity that Abbott deploys as the centrepiece of his campaign, spearheaded by his assault on Gillard's breach of trust over carbon pricing.

Swan's budget was delivered into the most adverse political climate imaginable. Swan's strategy is a part-courageous, part-desperate effort to do the right thing and try to halt the rot by returning to surplus, thereby creating a fresh departure point for the Gillard government.

His words fell on stony ground but the intent was obvious. "The deficit years of the global recession are behind us," Swan said. "The surplus years are here." His speech began with a declaration mocked by the Coalition -- that Australia faces four years of surpluses as most of the rich world stays mired in deficit and huge debts.

For Swan, this is a deeply personal quest: as Treasurer who validated the great plunge into deficit to avert recession three years ago, he wants to be the Treasurer who completes the cycle and regains the surplus. It is a "mission accomplished" ambition. Gillard and Swan must win the economic battle. If they cannot win the economic debate then they are doomed. Of course, they are probably doomed anyway but that does not gainsay the need to try to promote their economic credentials against an elusive Abbott.

Provided the non-resources sector does not fall into a hole, provided Treasury's forecasts are realised and the economy does grow at 3.25 per cent with tax receipts at a hefty 10 per cent plus, then Swan's strategy will be vindicated. Nobody should doubt his determination: asked at the National Press Club lunch whether he was ready to cut further during the year to guarantee his razor-thin 2012-13 surplus of $1.5 billion, Swan replied: "Yes."

Yet his strategy means a sharp and hefty fiscal consolidation of 3.1 per cent of gross domestic product in the year-on-year shift from deficit to surplus. It is a substantial withdrawal from the economy and a risk if Labor has misread the strength of the private sector. A more prudent government would have better spread the consolidation over time.

The Coalition has bet heavily that Labor's forecasts will fail. Shadow treasurer Joe Hockey's mantra has been that Labor will never deliver a real surplus. Opposition finance spokesman Andrew Robb accused Swan of "cooking the books" and said Labor had no coherent strategy of repaying debt.

Abbott has positioned himself in case Swan achieves his surplus, saying in his budget reply: "Even if the Treasurer is right, it will take 100 years of Swan surpluses to repay just four years of Swan deficits." In short, debt won't be addressed anyway. It is Abbott's narrative to cover himself if Swan's budget, unlike last year, hits its forecasts.

For Swan and Gillard, such a budget turnaround would normally be sold as the epitome of responsibility, leadership and toughness. That was the Keating technique. But Labor is too weak for such orthodoxy. The budget's problem is that it tries to do too much and solve too many political problems from too weak a base. If you are confused, don't worry: Swan wants to both abolish a $44 billion deficit yet deliver for Labor's low and middle-income earners by pouring more cash into their pockets.

The strongest message that comes through is redistribution. That is the message that Labor wants yet it betrays Labor's weakness. The purest political objective of this budget is to salvage the Labor base vote stolen by Abbott. It is Abbott's success that drives the new cash splashes. Labor is in torment at Abbott's hands.

Labor's electoral dilemma is that 37 per cent to 38 per cent of people identify as Labor-inclined voters but less than 30 per cent are voting Labor. The aim, therefore, is to regain lost Labor followers by cash bribes and tribal rhetoric. It is the overarching strategy. Gillard and Swan seek to reclaim Labor's roots, revive Labor values and champion Labor's battlers.

Swan prepared the pre-budget atmospherics with his attack on mining magnates. The budget itself cuts two ways -- it has $33bn in savings and $16bn in new spends, much being a redistribution that Labor seems to deliberately exaggerate and oversell.

In pandering to its base, Labor is obsessed about countering the public sentiment that "it's not my mining boom" along with anger about the carbon tax.

The carbon tax risks generating a bigger and bigger fiscal hole: Labor's first package involved hefty over-compensation but that didn't solve the politics so there is even more cash for families. Labor is desperate to convince people they are sharing the resources boom and are assisted against rising power prices.

Yet it has no answer to Abbott's elemental brutality: he says a true Labor government would simply abolish the carbon tax, an action Labor cannot take.

For Labor, the line is too fine between pitching to its battlers and indulging in class warfare. The tribalism on display this week from Gillard and Swan will play into Abbott's hands. It was sad to see Gillard and Swan operating as old-fashioned populists, denigrating Sydney's north shore, bragging about redirecting corporate tax cuts to households, slamming Abbott for representing, in Gillard's words, "one of the wealthiest electorates in the country" while voting against cash support to ordinary families.

Any electoral dividend from this tactic will be short-term. Let's await the result, but in the interim one outcome is apparent: this makes Abbott look very good. In his budget reply Abbott took the high ground -- he was appalled at Labor's class warfare, backed the idea of aspiration, said Labor was insulting the intelligence of the people and warned it was wrong to ever pretend one group of Australians was more worthy than another group. In the long run, this campaign is a gift for Abbott and plays to his skill as a values politician.

This is not to critique Labor's launch of new social policies -- a disability scheme, aged care reform and dental assistance -- yet such schemes are being squeezed by fiscal limits and being slotted into Labor's branding project.

While Gillard has recently tried to engage with business, this budget mocks such endeavours. Labor's values are on display -- it has ditched the promised corporate tax cut (for big and small business) to redirect cash to households. This reinforces the prime business worry about Labor -- that it fails to implement the reforms needed to make Australia competitive.

The deeper risk for Labor is that the values it champions in this budget may be rejected by the people. The fiscal consolidation is achieved almost equally with 1.5 per cent of GDP coming from higher revenue and taxes and 1.6 per cent of GDP coming from spending cuts. The big drivers of the surplus are higher taxes and slashing the defence budget. The risk is the public is hostile to new imposts and cynical about its new handouts.

Swan, however, has some results the Coalition would love -- spending as a proportion of GDP is down to 23.5 per cent, lower than most of the Howard era, and tax as a proportion of GDP is down to 22.1 per cent, below every Howard-Costello year. Swan is a low-spending, low-tax Treasurer, but that reality is contrary to the battler political strategy he projects.