We’ve been here before with the “this will be a tough budget” routine from Wayne Swan. Notoriously, 2008 was going to be the fiscal equivalent of the Texas Chainsaw Massacre, but ended up more like a Hugh Grant rom-com, with the Treasurer declaring the government hadn’t gone too hard on spending cuts because it would have “slammed the economy into a wall”.

The government faces a similar dilemma this year — while the resources boom continues apace, it is punishing other exporters with a high dollar. Risk-averse consumers are causing grief to retailers. The construction sector is in a steadily deepening hole. And there are question marks over global growth because of the stand-off in Washington over the US budget deficit and, acutely for Australia, inflation in China.

Swingeing spending cuts, therefore, run the risk of undermining demand at a difficult time for the non-resources economy.

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Except … there’s that commitment to return the budget to surplus in 2012, a commitment the government had a chance to cut and run from in the face of the Queensland floods, but that is now locked in. There’ll be an awful lot of shifting of spending around Forward Estimates to minimise the load on 2012-13, but that of course won’t get the government very far.

But there is plenty of soft spending in the federal budget, spending that has remained politically off-limits. Middle-class welfare. Defence spending. Health and ageing spending. The task of cutting into these budget areas is one that will outlive any return to surplus in 2012-13 or beyond, driven by the long-term need to ensure the budget can withstand an ageing population. Either that, or taxes will have to rise. Name your poison.

Crikey won’t be publishing across the Easter break, so expect us back in your inboxes choc full of goodness on Wednesday.

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Peter Fray
Peter Fray
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