Swan’s rock and hard place

It’s very lucky that Australia has been blessed with the World’s Greatest Treasurer, because newly-minted Labor attack dog Wayne Swan (Kevin Rudd, Clive Palmer and Gina Rinehart beware) is making it very clear that delivering the Federal Budget in May is going to be very tough work.

In a speech today to a business breakfast in Sydney, Swan has warned that government programs will have to be cut or killed due to the sharp drop in Government revenue caused by lower company profits and capital gains tax income.

Not surprisingly, the impact of the continuing European financial problems and Australia’s patchy economic conditions is buffeting the Budget’s top line.

And less income means spending will have to be cut if the Government is to keep its promise of returning the Budget to surplus in 2012-13.

Swan knows it’s a promise he cannot afford to break. Rightly or wrongly, this is a Government with a trust problem.

Too many voters still remember Prime Minister Julia Gillard’s promise not to introduce a carbon tax prior to the 2010 election. As the start of the carbon tax approaches in July, breaking another promise would be deadly.

So Wayne is sharpening his axe, looking for spending cut targets. His speech today is part of the process of softening us all up for those cuts – selling them, if you like.

I don’t envy Swan in this job. In an economy where business and consumer confidence is fragile, whispers of cuts are not going to give sentiment a boost. Indeed, jumpy consumers might well decide it’s safer to keep the wallet shut until we see what Swan unveils on Budget night.

Of course, in an environment where Government tax revenue is falling, the Government does need to make spending cuts. Not to do so would be irresponsible.

But whether the imperative to get the Budget back into surplus is as big as Labor claims is another question and many economists would argue that Australia could comfortably absorb another budget deficit if the Government needs to add a little extra support to a fragile economy.

Swan’s challenge now is to get the targets for cuts and the size of the cuts right.

It’s not completely clear where he’s going to cut, but I think with new Small Business Minister Brendan O’Connor now firmly ensconced in Cabinet we can be confident that the Swan axe will steer clear of small business programs.

Well, maybe not confident. Hopeful, perhaps. But I am sure O’Connor will be telling Swan that his portfolio needs support, not cuts.

Whether that support extends to the introduction of the proposed carry-back tax loss laws – the idea that small businesses would be able to reclaim tax paid on company profits in years where a loss is posted – might be in some doubt.

Swan may well argue this idea needs to be saved for better times, even if the next few years may be when SMEs need it most.

Of course, the big question for Swan and Gillard in all this is how big spending cuts are going to play politically.

Will the kudos Labor receives for delivering a Budget surplus be outweighed by the damage caused by big spending cuts?

It’s Swan’s rock-and-hard-place scenario. Now, if only he knew some billionaires who could stoke up their businesses and pay more tax…