Lindy Edwards May 14, 2013
As federal Labor wades through the quagmire of its budget woes this week, the government is reaping the consequences of a train wreck set in motion six years ago.
Generally when governments come to power they spend their first year in office gutting the legacy of their predecessor.
They express outrage that the budget they have inherited was worse than they realised. They attribute major emerging policy challenges to the mismanagement of their predecessors.
And they cut the beejeebies out of the predecessor's policies that they hate.
This slate-clearing exercise buys them a little bit of clear air where they can make unpopular decisions without being blamed for them. They also tend to cut hard in the first budget, which frees up resources they can spend on their own agenda for the rest of their term in government.
New governments do all the hard stuff upfront and then spend the next several years spending and building a positive agenda.
The arrival of the global financial crisis and the government's adoption of the stimulus package cut short this essential phase for any new government. It has been a disaster for Labor, with long-term consequences.
Labor's dilemma was that the government did inherit a major problem from Peter Costello, one that they should have labelled at the time as his economic legacy.
In 2007 they knew the budget was in structural deficit. Costello had used windfalls from the mining boom to create election sweeteners that had long-term costs on the budget, like the bloated family payments system. In effect, he had used his birthday money to take out a mortgage he couldn't afford.
In any normal first year of the political cycle, Labor would have been yelling from the rooftops about the problem and used it as a rationale for cutting hard into Coalition policies it opposed. But because of the GFC, the government could not do that on two counts.
First, it couldn't implement the cuts because it would have counteracted the stimulus, at best nullifying it, and at worst throwing the economy into a deep recession.
Second, the government could not even really talk about the problem and ensure Peter Costello was blamed for it, because it could not go out and talk up a long-term budget crisis while also arguing for a short-term stimulus package. The economics of it might have made sense, but the story was too complex to get across.
Labor was left with a major problem that was both political and economic. Having missed the window to attribute the structural deficit to Costello, the government was being criticised for lavishing money on the stimulus package. And in the government's back pocket was a structural deficit for which Labor was going to have to carry the can, and it was facing sharply declining revenue as the GFC hit business profits.
To top it all off, the government had not left itself any money to implement Labor's agenda. Labor was going to have to introduce cuts to pay for any new initiatives.
This is basically what the government has done, with each of the subsequent budgets being a rebalancing exercise. Labor has been systematically cutting cash handouts to the top and middle to broaden and strengthen the delivery of safety net services.
We have seen the government cut the private health insurance rebate and family payments, and move the money to mental health services, dental services, disability services and schools.
Each year the government has struggled to explain why it was taking with one hand and giving with the other. Labor has been accused of incoherent budgets that didn't make sense, but it was the only way the government could implement its agenda.
Now the beastie has really come home to roost. The mining downturn means the birthday money has dried up, and the government is well and truly caught high and dry.
The question that will haunt Labor dinner parties for years to come will be: ''Should we have introduced the stimulus package?''
On the one hand, it is probably the government's most important policy achievement. The Organisation for Economic Co-operation and Development estimates it saved up to 200,000 jobs.
The experience from the 1990s recession was that a very large proportion of those who lose their job in the first year of a recession are still unemployed 10 years later. There are huge long-term social and economic benefits in averting a downturn.
Not to mention if we hadn't gone the stimulus route, the economy probably would have gone into recession, for which Labor would have been blamed; it would have been bundled out of office anyway.
But as the world falls down around their ears this week, the Gillard government's members will be wondering if there was anything they could have done differently.
Lindy Edwards is from the International Political Studies Program at the University of New South Wales and the author of The Passion of Politics: The role of political ideas in Australia.
