Houdini Act By Costello

by Glenn Milne - Sunday Mail (Qld)

The current climate of interest-rate pressure and claims the Government is "heavying" the Reserve Bank of Australia to keep rates low has set the scene for a May Budget that will be the most critical in Peter Costello's term as Treasurer.

At stake is the electoral future of the Coalition – and Mr Costello's chances of taking over from Prime Minister John Howard. If he gets the Budget right, the Treasurer is likely to succeed Mr Howard and give himself an even chance of beating Opposition Leader Kim Beazley at the next election.

If he gets it wrong, Mr Costello will become damaged goods inside his own party. This will see his leadership chances falter for two reasons. First, he will become the target of voter resentment over increasing interest rates – a broken election promise. And second, Mr Howard is less likely to hand over the Prime Ministership if the perception is he's "cutting and running" because the Government has failed on the economy.

Mr Costello is acutely aware of the size of the task. But as Cabinet's Expenditure Review Committee (the Government's Budget razor gang) goes about its business, there's also an awareness at the highest levels of Government that the problems the Treasurer faces are not all of his own making.

This Budget will have to begin paying off the Prime Minister's election campaign promises – estimated by Labor to be worth a staggering $66 billion. But Cabinet sources say the Treasurer was never consulted about many of these promises.

According to ministers, Mr Howard was offered a range of spending pledges to choose from at the time of his official election campaign launch. But he shocked many by opting for most, if not all of them, leading to the famous charge that he spent about $200 million a minute during his speech.

This spending spree is putting additional upward pressure on interest rates, just as the Reserve Bank warns of further rate rises to head off a potential surge in inflation. Those inflation fears are fuelled by the economy hitting capacity constraints – manifested by a shortage of skilled workers and a spike in wages in key sectors.

The irony is that many in the Government believe Mr Howard didn't need to buy his way back into Government. According to some in the Cabinet, the Government was always going to beat a Mark Latham-led Opposition for the same reason the Coalition is now under pressure – because voters did not trust Mr Latham to keep rates low.

Labor's shadow Treasurer, Wayne Swan, encapsulates his opponent's dilemma: "Howard ran right over Costello at the Liberals' campaign launch. But it's Costello's credibility that's going to suffer."

It now turns out that Mr Howard's election hyperbole on interest rates may also have set the Treasurer up for a Budget-time fall. Voters will not forget this central pledge. They've seen rates go up once; then watched this week as it was revealed the Reserve Bank had expressed private concerns during the campaign over those rate claims.

The Government breathed a sigh of relief on Wednesday when the Reserve kept rates on hold – for the time being. But prolonged uncertainty will be almost as damaging as an actual increase.

Mr Costello's task will be to ease the pressure on rates by delivering a sizeable Budget surplus. But it cannot be achieved by junking the Prime Minister's election promises. So, politically sensitive savings must be found elsewhere.

At the same time, the Government cannot afford to give stimulatory Budget tax cuts when the Reserve is worried the economy is going too fast. Yet when families are feeling the pinch from interest rate rises, high petrol prices and increased private health insurance premiums, they'll be looking at a big surplus and asking: "Why can't we have some of our own money back?"

If Mr Costello gets out of this one, he may well deserve the title "Houdini".