In the Hollowmen budget episode, minders struggled to find a story that would create big numbers and add vision to a boring budget.  This year the government has tried to do the opposite, making a budget with some potentially very big numbers look boring.  Far from being a Robin Hood budget or a horror story, the differences between Wayne Swan’s second budget and something that John Howard might have brought down are peripheral.  The LAW tax cuts are still there, pensioners get a bit more and the future will have to look after itself.  Peter Costello on the other hand is probably turning in his political grave, but is he yet ready to rise from the dead?

The problem is not so much how much is being spent now, because in fighting a recession now is the time to invest in infrastructure, but the lack of willingness to put the budget on firm footings.  The desperate ‘me too’ tax cuts for the rich of the last election have been treated as gospel and the only long-sighted announcement is the extending of the pension age to 67.  This in itself is mean-spirited and probably counter-productive; it is robbing the future poor to pay the current poor.  Like reforms to address long-term unemployment it is likely to simply increase the ranks of disability pensioners.

A serious assault on middle-class welfare would examine the unsustainable promises inherent in defined benefit retirement schemes, but the Hollowmen, like politicians, can be trusted to look after themselves.

The key signal that the government is not yet serious about putting the budget on a sustainable path is that expenditure changes based on policy decisions are still expanding in the outer years.  For the 2011-12 budget year, when economic growth is predicted to be a very healthy 4.5%, the effect of  policy decisions since the updated economic and fiscal outlook is to increase the deficit by $6.95 billion.  So on top of the short falls in revenue from the financial crisis, the government is still making more promises that it can’t afford to pay for, even when growth returns.

To be running a budget deficit of $45 billion, 3.2% of GDP, on the basis of 4.5% economic growth suggests that there is now a structural problem in the governments finances.  There is no question that financial markets will be happy to fund the government for a good while yet and the triple-A credit rating is not in doubt, but at some point there will be a reckoning.

Having prepared the public for a ‘horror’ budget, the actual delivery is limp wristed.  There is in fact no deficit exit strategy, because what is proposed is dependent on Chinese mineral demand bringing the boom times back.  That’s not a strategy, it’s a gamble.

There are no hard choices in this budget.  Reforms to the health insurance rebate should really be called cuts to upper-class welfare, with the only cost reductions to middle class welfare being the reduced indexation to Family Tas Benefits, but even these changes will really only fall on higher income earners.  The biggest losers are those toiling on low incomes that have just had 2 years added to their sentence.

The problem with this strategy is that the money Kevin Swan is leaving in the hands of high income earners is unlikely to go into the economy.  They will save because they are uncertain about the future, and they will save because they expect taxes to go up in the future.  This is Ricardian equivalence, the argument the Liberals used to attack the cash stimulus payments, but is much more valid for high income earners that have the capacity to save.  Better off to tax high income earners now so that everybody knows where they stand.

By leaving a budget in structural deficit Labor also endangers its legacy.  While the Liberals appear to have no constructive suggestions on what they would do, when they are next in power they will return the budget to surplus.  The Liberals will also have a choice on how to do it, either by cutting programs or raising taxes.  You can bet that they will cut Labor programs.

It may be that the limp-wristed budget is designed to hold back the hard choices for the Ken Henry Taxation review, with the community response to a $300 billion debt burden all part of the softening up process.  It may also be that the government simply didn’t have the will to push a tough budget through a divided Senate.  Thus hard choices may need to wait until the next election.

Perversely, by defending the unsustainable tax cut promises that spent the last ounce of revenue from the commodity boom, Labor is protecting John Howard’s legacy at the expense of their own.