Turnbull must confront his fiscal challenge head-on

Having squeaked back into office, Malcolm Turnbull’s immediate task is to work out his frontbench, given he’s lost three ministers and the Nationals are pushing for more representation. There’s also been speculation since before the election about Health Minister Sussan Ley, which has only been reinforced by the emerging consensus that Labor’s Medicare scare campaign was central to its election performance, and Turnbull’s acknowledgement the government prepared the ground for that campaign.

That speculation ignores the fact that Ley was prevented from responding to Mediscare by Liberal HQ — even to the extent of being banned from the traditional pre-election portfolio debate with her opposite number, Catherine King. It also ignores that Ley was successful in getting the incessant health controversies that marked the Peter Dutton era in that portfolio off the front pages — remember when Tony Abbott himself was reported to have rebuked Dutton about his mishandling of the GP co-payment? Ley also had the gumption to take on an important Liberal Party donor, Sonic Healthcare, over pathology bulk billing rebates, a waste of money that was flowing directly to Sonic’s bottom line — until a panicked Turnbull decided he needed a deal with them.

[How Mediscare — and Turnbull — delivered for Labor at the 11th hour]

A much more credible candidate for being moved is Treasurer Scott Morrison, who had a poor campaign and who hasn’t performed well in his time in the portfolio. In Immigration, Morrison was ruthlessly effective; in Treasury, he looks all at sea and has struggled of providing either the political or policy leadership the government needs. His removal, however, would be yet more instability for a government that is already riven by bad blood, ideological clashes and profound divisions that are likely to make up much of the history of the Turnbull government, whenever it is written.

[Fantasy cross-party war cabinet — who makes the cut?]

More likely, economic leadership will continue to be provided by Turnbull himself, aided by Martin Parkinson and David Gruen at PM&C, at least until Treasury secretary John Fraser moves on (and, here’s some idle speculation, Gruen replaces him). And the priority for now is instilling some fiscal discipline in this government, because it has none. The government inherited spending at 24.1% of GDP. It immediately blew that spending out to 25.6% of GDP and then increased it to 25.8% of GDP. This financial year it is forecast to be 25.8% of GDP yet again. It will still be above 25% of GDP in 2020. Net debt has increased from 10% of GDP to nearly 19% of GDP. The return to surplus has, every budget, been pushed out another year.

Worse, all the political risks are on the downside for fiscal policy. Forget the nebulous threat of a hard-to-negotiate-with Senate, Turnbull faces an in-house rebellion on those retrospective superannuation tax changes that are Morrison’s best work so far as Treasurer (a rebellion aided by media commentators blaming campaign failures on disillusionment within the Liberal base about them. In fact, there’s no hard evidence of any significant concerns along Liberal voters about the changes). Then there is the toxic clutch of rent-seekers known as the Nationals, who will want to use their increased influence within the government to waste more money on boondoggles and rorts like dams and concessional loans to farmers (hundreds of millions of dollars are already being wasted on the latter). There will also be pressure from Labor and doctors’ groups to increase Medicare funding — imagine the government going to the next election with Labor pointing to no changes in funding and saying “see, we told you so”. All that’s before Turnbull gets to the Senate, where Nick Xenophon awaits with a manufacturing industry plan big on good old-fashioned government interventionism.

[The old songs are the best ones: porkbarrelling and protection ride high]

In its statement about placing Australian on negative outlook, Standard & Poor’s said it would be watching MYEFO and the next budget carefully, suggesting the government has plenty of time to get its house in order. But MYEFO is five months away; Turnbull has a political need to set the tone early, not allow yet more of that drift and confusion with which he became associated early this year. Some sort of substantial economic statement in coming months (relegating MYEFO to the budget update it used to be) is a must for Turnbull to set the fiscal rules of this term — including abandoning the latter stages of his giant corporate tax cut, which can be relegated to one of those Abbott-style aspirations for when the deficit is substantially improved. Perhaps Morrison could be charged with working out ways to address those “excesses” of negative gearing he used to speak about in a manner sufficiently distinct from Labor to avoid charges of hypocrisy.

Without that sort of thinking, the real risk is that the government’s fiscal position will degenerate further before it improves. And that’s a bad outcome for all of us, not just the finally elected-in-his-own-right Prime Minister Turnbull.