An economy in transition – now more than ever: Keane

If, as the Opposition and some in the media claim, Treasury has been politicised by Labor, it’s got a funny way of showing it: Yet again the government has been forced into a round of spending cuts and tax rises to maintain its surplus commitment in the face of under-performing revenue?—?not for this financial year, which was abandoned last December, but for two years hence.

The bank levy doesn’t quite fall into “chasing revenue down” category?—?it will do little to offset the $33.3 billion in lost revenue over the next four years, and only make a substantial impression beyond 2016. But the tobacco excise increase is a venerable revenue-raising trick, as is yet another increase in the public service efficiency dividend (above and beyond the recent Special Executive Service efficiency dividend), as well as yet another lift in visa application charges.

Political victimless crimes, more or less?—?unless you’re a smoker, a foreigner, or a public servant.

But Treasurer Chris Bowen has stayed consistent with Wayne Swan’s decision not to keep chasing revenue down in the current economic environment by chasing more immediate cuts: the statement on the whole is net more spending this year and next, and then substantial net savings in 2015-16 and 2016-17.

That decision is reinforced by the gloomier economic picture this statement presents?—?much higher unemployment, over 6% for the first time in years, lower economic growth and, from the government’s point of view, the real killer: a big fall in forecast nominal GDP growth, which is the main reason behind the $33 billion writedown in revenues.

With this forecast, an interest rate cut now seems more likely next week, assuming the Reserve Bank shares Treasury gloomier prognosis for the Australian economy for the remainder of this calendar year and next.

It’s a tough environment in which to go into an election?—?but as Prime Minister Kevin Rudd and Bowen have been at pains to say since they replaced Julia Gillard and Swan, this is an economy in transition. And that transition just got more difficult.

This article first appeared on Crikey.