<b>Letter from Australia:</b> Saving to invest in the future

PLAYING house calls for a balancing of interests that former diplomat and bureaucrat Prime Minister Kevin Rudd seems well suited for. He'd long set Treasurer Wayne Swan three competing challenges for a strong but slowing A$1.2 trillion (RM3.6 trillion) economy in the face of an uncertain global environment.

In the first budget for a Labor administration back in government after 111/2 years, election promises had to be kept.

Yet the inflation genie was threatening to get out of the bottle. The challenge was to keep the handouts from fuelling consumption that would set the central bank applying the brakes, raising interest rates that would claw back the gains to the "working families".

All this against the backdrop of a government voted back last November on a platform of nation building.

Market economists give the budget a tick. As a social democrat, Rudd passes the test as an economic conservative.

Political observers such as Monash University's Nick Economou are cynical. Measures at the margins apart, it's more of the same from "the other (conservative) mob".

Yet the budget that Swan handed down last Tuesday is in tune with the former diplomat, bureaucrat, academic and consultant to KPMG given to draw into his council disparate groups of varying interests.

As has been demonstrated with Rudd's consultative dealings with state and territory leaders in the Council of Australian Governments, and his casting of the national net for ideas in his 2020 Summit.

It may be too early to mark Rudd as the consensus leader of his predecessor of the early 1980s, Bob Hawke, but Rudd is no populist, in the estimation of Macquarie Group chief economist Richard Gibbs. "I would say he is a blend of the two, to be honest."

As with Hawke before him, Rudd came into the Labor leadership seeking to cultivate business and labour to work towards his nation-building goal.

Overtures to business have had the party faithful suspicious of a leader who had not risen from among traditional union roots. To these true believers, this first budget in Rudd's term may not represent a reshaping of Australia after 111/2 years of a Liberal-National coalition under John Howard.

Others may see limits put on middle-class welfare as evidence of a government seeking to redistribute wealth.

A closer scrutiny might suggest the makings of a government in Labor tradition.

Against the better advice of economic purists, Swan delivered every bit of the election promises, while keeping an eye on inflation by saving now, to spend later.

"Working families" get A$55 billion in tax cuts, child care and housing and other supports.

Yet the budget delivers a record surplus of A$21.7 billion, which, with the surplus for next, will provide A$41 billion for investment in three funds set aside for infrastructure, education and health.

"We are going to have a national government which is committed to the business of nation building, using the taxpayers' money to do that," Rudd said on radio in selling the budget, "(rather than) waste this money on consumption".

Rudd's approach is not one instantly identifiable as traditional Labor of the Keynesian pump-priming kind. It is modern Labor promoting partnerships between the public and private sectors, and between federal and state governments.

It is radical, in the estimation of ANZ bank chief economist Saul Eslake, in that the building and maintenance of infrastructure had long been the responsibility of the states.

"You can either, as the Australian government say 'not my problem', and handball it to the states or somebody else," as Rudd said on radio. "Or you can say, let's roll our sleeves up and do something about it.

"And on the question of economic responsibility, it is possible to do that, that is, be a nation-building government, and, at the same time, make proper provisioning for the long-term future as well."

Underpinning that long-term prospect is the driving demand from a rapidly industrialising China.

Rudd has long said he would not want to be prime minister of a country that did not make anything. Investing in the future on the commodities boom of the present would be a step towards that.

China today represents a long line in the charmed life of an Australia rich in the resources in demand in industrialising nations - unbroken from Japan 50 years ago to Korea and Taiwan and the emerging dragons of Asia.

In the present cycle, Australia has had more than 16 continuous years of economic growth.

The opportunity that demand from China gives for Australia to build for the future could stretch decades, on Eslake's reading, given the experience with Japan and the other Asian economies.

The scale of Chinese demand particularly marks its implications for Australia. To that, Gibbs adds the urbanisation that distinguishes China's need for raw materials.

Gibbs gives Swan's budget a high pass mark while Eslake, long critical of governments giving handouts for current consumption, welcomes the change setting the government down the track to save for the future.

Both, however, note a caution to expend the political capital that Rudd has at his disposal, with more than 70 per cent popularity in the face of an opposition in disarray.

The budget is modest and cautious, but Rudd has given notice of a "root and branch" review of the tax system to report by late 2009.

Letter from Australia: Saving to invest in the future