Of course, a true politician would never answer “Yes” to such a question, but Kevin Rudd and Wayne Swan must be grumbling among themselves about how much tougher our economic circumstances and economic prospects are, or at least were admitted, during the last election campaign.

In that campaign, I sat through and commented on the televised debate between Peter Costello and Wayne Swan. There was virtually no mention of the magnitude and significance of the sub prime crisis and subsequent financial turmoil, of the possibility of the oil price reaching $US115 per barrel or more, or of gold hitting $US1000, or even that the US economy was in recession, which could prove to be quite deep and sustained.

At the time the whole debate was more about who was the “biggest conservative”, which party would run the more responsible fiscal policy, yet also who’s tax cuts were “bigger and better”.

I’m sure reality is now thumping Rudd/Swan as they move into the final stages of the preparation of the Budget for 2008/2009. The Government remains committed to delivering its tax cuts in full, and to running a budget surplus of about 1.5% of GDP. They’ve also committed, via their “razor gang”, to deliver substantial expenditure cuts, while embarking on their “education revolution”, and a host of promised social policy initiatives.

Fortunately, the revenue base for next year’s Budget is still very strong, as a legacy of our economic strength, and corporate earnings, due particularly to the resources boom of the last several years. Indeed, I believe it will be relatively easy for them to announce a Budget surplus approaching $20B.

However, as our economy inevitably slows due to slowing world growth and as our excessively high interest rates bite over the next 12 or 18 months, even given our commodity links, and links to China, the Government’s revenue base in future years will be significantly constrained.

Politically, of course, the first Budget of a new Government is the best, if not the only, opportunity to get the Government’s financial house in order, and to initiate significant changes in both economic and social policy.
The second Budget tends to become much more political, and the third, in our three year political cycle, usually ends up totally political, as the Government tries to ensure its re-election.

While Rudd has already enjoyed an unbelievable honeymoon, greatly helped by his succession of popular symbolic gestures, a particularly weak Federal Opposition, and an “embedded” media, the Budget will be the first real test of his Government’s capacity to deliver substantive policy. Carefully, watch this space!