Mini budget may need major sell job

You’ve got to hand it to Julia Gillard. After seeing her approval rating sink to what many believed was the point of no return, Gillard has seen her rating jump by six points and Labor has clawed back some ground from a two-party preferred standpoint.

Exactly what’s turned things around is hard to read. Was it Gillard’s statesman-like performances at the Commonwealth Heads of Government meeting in Perth? Was it her appearances alongside US President Barack Obama? Was it the passing of the carbon tax through the Senate?

Who knows, but even the intervention in the Qantas dispute – which to many highlighted flaws in Gillard’s Fair Work regime – seems to have given Labor a poll boost.

Gillard will now try and keep the momentum going by taking action to meet what the Government sees as one of its most important promises – the pledge to get the Budget back into surplus by 2012-13.

According to a report in the Australian Financial Review, the Government will unveil a special pre-Christmas mini budget in the coming weeks that will unveil spending cuts to keep the surplus promise on track.

Apparently, the cuts can’t wait until the next Federal Budget in May 2012, as they will need time to take affect before the 2012-13 deadline.

As Treasurer Wayne Swan warned in his weekly economic note yesterday, the turmoil in Europe is clearly affecting global trade and that will flow through to weaker government revenues, which have fallen by $130 billion since the onset on the GFC.

That, Swan says, proves why the Government needs to maintain its “Budget discipline”.

“The hit to government revenues caused by the global turbulence means we’ll have to continue making tough budget decisions,” Swan said yesterday.

“Our record of fiscal discipline helps underpin confidence in our economy and supports job creation. It also gives the Reserve Bank room to move on interest rates, as we saw earlier this month.”

Expect economists to be divided on the idea of spending cuts in a mini budget.

While many complained after the Budget in May that Swan didn’t go far enough with cuts (indeed, as ICAP economist Adam Carr has pointed out this morning, spending actually increased) there is also a group that believe the surplus promise doesn’t really need to be met. For these economists, supporting the patchy economic is more important than meeting a political promise.

It will be fascinating to see where the Government decides to cut and how deeply; reports suggest the defence, health and social services portfolios are the key targets.

It is to be hoped that the Government will stay well away from cuts to business programs in the current environment, but it should be noted that any social services cuts could flow through to retailers.

It will also be very interesting to see whether the Government can do a good job of selling any cuts that it makes.

Clearly it believes that it will lose any slim chance of winning the next election if it misses its Budget surplus promise. But selling health care and welfare cuts at a time when the economy is slowing doesn’t sound like an easy job to me.