Today’s Reserve Bank forecasts complete the likely picture that will emerge on Tuesday night. Despite the difficulty of the policy challenge this Budget presents, its broad direction has become clear in advance: a relatively mild and short recession, sufficient to scare the government into taking some much-needed remedial action on the structural budget, whilst trying to hold off on anything that will endanger the recovery in 2010.

The RBA’s number are not Treasury’s numbers and we won’t see those until Tuesday, but there’s unlikely to be a big disparity (there wasn’t last year). The RBA sees us dipping into recession this year, but emerging in the first quarter of 2010 with tepid, but accelerating, growth thereafter.

Before this week that forecast might have been considered optimistic. But retail data and the April Surprise in the jobless numbers yesterday — even if flawed — suggest the RBA is right to conclude things won’t be as bad as 1991.

It has also become clear from the Government’s judicious leaks that a clawback of tax expenditures is underway — especially an assault on one of the Howard Government’s worst policies, the private health insurance rebate, which is long overdue.

Against the usual government trend, this may be a better budget than the 2008 effort, where savings punches were pulled out of concern at what was coming economically from overseas. There were no really tough decisions in that Budget, nothing that might have sent a shiver through backbenchers. The indications are that this one will finally show the Rudd Government has a fiscal backbone, although it may rely on delaying the pain by phasing out expenditure rather than chopping it on 1 July (a parental leave scheme may get the same treatment).

This can be justified on the basis that expenditure can’t be slashed now but needs to start tapering off as we move toward recovery, but it leaves the door open to rentseekers and lobby groups using the intervening period to overturn decisions affecting them, especially once we’re into 2010.

And then there’s the Senate, which is likely to knock back the more unpopular measures as part of the Coalition’s desperate effort to lay a glove on Kevin Rudd. The more they do that, of course, the more Rudd will point out the absurdity of the Coalition claiming to be better fiscal managers. So we’re likely to go through alcopops-style brinkmanship time and again over the next few months, with last-minute cave-ins, backroom deals and plenty of claims of irresponsibility from both sides as the Government works to get savings measures passed. There’ll be more than enough hypocrisy to go round and we can all enjoy the sight of Steve Fielding yet again tearing his hair and rending his clothes as he tries to work out how to vote.

But if the Government is sufficiently worried to launch a genuine assault on spending, it will have surprised by actually using the recession to achieve some genuinely worthwhile outcomes. For a Government whose idea of toughness has so far been to yell at hosties, that will be a welcome development.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey