CHART: The Budget Pain That's Coming Is Driven By The Political Cycle

It’s just over six hours until Joe Hockey releases his first budget.

The 2014 budget outlook from Scott Haslem at UBS contains a simple chart that shows the likely cuts we’ll see tonight compare against the path to surplus charted by the National Commission of Audit.

The dotted line shows how the spending cuts outlined by the audit commission would return the budget to 1% of GDP in a decade – the brief they were given by the government. The red line shows that, in Haslem’s view, the government will actually take a harder path than the commission’s route by cutting harder than would be apparently necessary.

Courtesy UBS

There’s a simple explanation for this and it’s to do with the political cycle.

With a first budget, there are two challenges that a government needs to negotiate. In the short term, there’s a need to start delivering on its election promises: in this case, to fix what it has positioned as the “budget mess” left by the Rudd and Gillard governments – the overarching theme of this budget and something that we’ve been told about repeatedly since the Coalition came to office last September. To deliver on this, they need to be seen to be taking the “tough decisions” they have been promising. If they squib it by not reducing spending quickly enough they’ll be massacred, politically speaking.

The second thing the government needs to pirouette through is the longer-term electoral cycle. The government will, in all likelihood, be going back to the country in 2016 seeking re-election. Finding sufficient budget savings now – for example, through the deficit levy and perhaps a temporary indexation of the fuel excise – will give the government the breathing room it needs for a classic election-style budget in May 2016, where it can wind back some of the hard-hitting measures to help the bottom line, and put cash back in people’s pockets from July that year, just as voters’ minds are starting to focus on who to vote for.

The politics always make for a fascinating element of budget nights, with the government talking about stewardship of the economy and the national interest, while everyone knows it is just as much about stewardship of their electoral fortunes. Join us tonight from 7.30pm AEST as it plays out.

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