Rudd's radical strategy

THE clash of values between Kevin Rudd and Malcolm Turnbull over the role of tax cuts in avoiding recession is worthy of the challenge facing the nation, even if the politics so far has been more bloody-minded than usual.

We need our leaders to be jousting on big ideas at this moment. The problem to date is that here, and in the US and Britain, a substantial part of the argument is trapped in a time zone.

The Centre-Left can't let go of its economic rationalism, so it gets caught with the mixed message of giving money to people to spend, and telling them to take out a mortgage, when it really wants to scream from the rooftops that the crisis in capitalism is due, in part, to the pressure placed on households during the boom to borrow merely to consume.

The Right can't get used to the idea that the whistle has been blown on its upside version of the free market, where taxes were cut in the name of personal freedom at the same time that the size of government kept growing to provide the illusion of entitlements for all.

That's why Centre-Left governments such as Rudd's borrow to spend in the real economy while pretending to be prudent, while the oppositions on the Right call for tax cuts in the name of pump-priming.

Each side seems to be moving toward a Keynesian consensus until you remind yourself that Australia's version of this debate is already more sharply ideological than it is in Barack Obama's US and Gordon Brown's Britain. Rudd is the only Western leader to have explicitly removed tax cuts from his fiscal arsenal.

This proved to be a red rag to Turnbull who took the crazy-brave option of voting against the Government's entire $42billion stimulus package. The political calculation was that Labor would get the numbers in the Senate to pass its package so voters wouldn't think that the Coalition was denying them their money.

But that gamble backfired on Thursday when South Australian attention-seeker senator Nick Xenophon voted with the party poopers.

Rudd may allow himself a quiet chuckle at the Opposition Leader's expense but he would recognise that Turnbull is playing a longer game. Tax cuts or cash handouts is a proxy for a wider tussle about the role of government in the recovery.

These two are, in a sense, happy with what the other says about themselves.

Rudd is for big government, because he believes that government does a better job of nation-building than business. Turnbull does want to let the markets rip because he believes citizens do a better job of spending their own money in the national interest than politicians.

Both men are laying down philosophical witches' hats to guide Australia into the next decade.

What is easy to overlook in the cartoon slogans of Senate obstruction is that Rudd's position is potentially the more radical. Recall that Paul Keating and John Hewson agreed on the very thing that Rudd and Turnbull are fighting about now.

Keating's recession-busting package in 1992 contained personal tax cuts of the same order that Hewson had offered in his Fightback platform. They brawled instead over the GST, Medicare, the labour market and the timing of spending cuts.

Rudd has already flagged that the budget will be restored to surplus through bracket creep. Tax cuts, if they are to come in the next recovery, will have to be paid for with tax hikes or spending cuts elsewhere. Keating argued the opposite in the '90s recovery, that tax cuts could be paid for by bracket creep.

But before we can jump to the future, we must assume that the collective wisdom of the world's economic arbiters in the US and China will finish the global recession before Australia gets in too deep.

Rudd has already set the course for a deficit of $50 billion in 2009-10. The hint is contained between the lines of Treasury's latest forecasts. The message in the advice is that the danger period for the local economy is the next financial year.

The deficit for the present financial year is now put at $22.5 billion: a switch of $44.2 billion on the surplus of $21.7 billion that had been forecast in last May's budget. The breakdown of this transaction is where the story lies. Of the $44.2 billion lost on paper, $23.2 billion represents active policy choices while the remaining $21 billion are the so-called automatic stabilisers at work: the lost revenue and increased spending that comes in a downturn without the Government lifting its finger.

The deficit looming for 2009-10 involves a more dramatic deterioration from a forecast surplus of $19.7 billion in last year's budget to a forecast shortfall of $35.5 billion.

Barely $20 billion of the $52.2 billion wiped from the bottom line represents direct government action. The majority has been imposed by the rest of the world, most notably our recessed trading partners killing the golden goose of corporate tax revenue.

Put two and two together. If 2009-10 is crunch year, then Labor will want to be spending more than here than in the present financial year.

Watch the upcoming budget closely. It will include a boost to pensions, probably the dole, and more than likely another round of cash and infrastructure that will surely send the deficit toward $50 billion.

Turnbull can't make his case for tax cuts at the next election and beyond without spending cuts. Rudd, on the other hand, has the flexibility to keep spending until the world tells him to stop.

If Rudd does find himself on the correct side of history, the role of government will have changed beyond recognition by the time he leaves office.