Amidst an impending sense of economic gloom courtesy of the Global Financial Crisis (GFC), the Brumby Labor government has bought down a politically clever budget.

The 2009-10 budget delivered by treasurer, John Lenders, conforms to the pump-priming standard being pursued by governments across the world and promises to mitigate rising unemployment with an extensive program of public works.

It promises to do this with state borrowings that will accumulate debt to a projected $16 billion by 2013, although the treasurer is quick to point out that this represents a debt-to-domestic product ratio of 5 percent – a fraction of what the debt used to be in the old days, when the Victorian government had to borrow money to fund infrastructure investment for authorities like the now defunct State Electricity Corporation.

The political cleverness of the budget can be found in the balancing act it seeks to achieve between claiming to be exercising fiscal restraint by coming up with an ‘operating surplus’ of $165 million, yet giving the impression that it is acting in a bid to head off an unemployment rate approaching seven percent, by announcing infrastructure projects worth $11.5 billion.

The budget also seeks a middle path on taxes.

On the one hand, the government has resisted persistent calls from business for tax relief through cuts to indirect taxes, but, on the other hand, it has not raised state taxes either. 

Moreover, it has not made any pledge to hold or freeze taxes and charges.

Preserving the operational surplus will be of utmost importance to the government’s political strategy as it heads in to 2010 – an election year.

The Liberal-National opposition will seek to cast Mr Brumby’s government as being responsible for an escalation of state debt, and comparisons will be made between the Brumby government and the Cain and Kirner Labor governments that presided over a major decline in the state’s public finances in the early 1990s.

It will also be the case that the opposition leader, Ted Baillieu, will point to the increase in state borrowing required to pay for infrastructure projects foreshadowed by this budget.

Many of these projects, of course, had been announced before under the ‘Transport Plan’ released earlier this year.

Treasurer John Lenders has sought to counter the accusation that Labor has recycled these promises to build new roads and railways for the third time by saying the budget has indicated that these projects will be started sooner rather than later.

In the meantime, Labor will seek to project the notional surplus as a counter to the Liberal claims of government profligacy.

For all the criticism of the Labor budget, there is a sense that the Liberal party’s ability to score political points on this year’s offering has been severely constrained by economic circumstances.

The emphasis on infrastructure investment would have been a central plank of the budget even if Mr Baillieu was the premier and the coalition was in government.

This is due to two important considerations: first, it is clear that bringing forward rail and road projects will help alleviate unemployment in the event of a GFC-induced slowdown in the state economy; and, secondly, the state government is simply responding to the policy direction being set by the federal government in Canberra.

Indeed, the significance of the federal government’s role in the Victorian budget is an important feature. The budget makes constant reference to the fact that the Commonwealth will be a major contributor to the building of roads and rail, as well as the revamping of a number of Victorian hospitals.

The Victorian government has been able to minimise its exposure to debt by relying on the Commonwealth to take up a large share of the proposed infrastructure funding.
Mr Brumby’s dependence on Mr Rudd and the federal Labor government goes beyond relying on the fiscal generosity of the Commonwealth for the forthcoming financial year, however. The Victorian Labor government may be riding high in opinion polls at the moment, and the Liberal opposition has been struggling to get any traction in its attack on the Brumby administration.

State politics tends to be hyper-sensitive to economic decline, however, and governments that prevail over declining economic activity and rising unemployment tend to struggle at subsequent elections.

By returning an operational surplus whilst promising to bring on infrastructure projects as a way of absorbing anticipated unemployment, Mr Brumby has probably done all he can to try to ensure that he has a smooth run to the 2010 election.

But because the federal government has great influence over national economic policy, and because so much of what the Victorian government wants to do depends on federal policy decisions, it is actually Mr Rudd who will influence the direction Victorian politics takes in 2010.

If the federal Labor government’s attempt to mitigate the Global Financial Crisis turns out to be a disastrous failure, it will be the state Labor governments that will probably end up taking the blame for it at the ballot box.

Dr Economou is a senior lecturer in Politics at Monash University