‘The impact of the budget is not only wicked but wasteful.’

The 2014 federal budget is built on the big lie that the Australian economy is facing a debt crisis. The proposition that the ‘‘debt and deficit’’ had to be reduced was the excuse for the even bigger lie before the election that there would be no surprises, no cuts to health, education or public broadcasting and no tax increases.

Post-election, it was explained that these promises had to give way to the national interest – defined as reducing government debt. To demands by critics of the budget that the government at least admit that it had been lying in the run-up to the election, the response was along the lines of, ‘‘You haven’t been listening, we always said that dealing with the deficit was always our first priority and that in government we found that Labor had covered up the full extent of the debt problem’’.

The truth is, the Commonwealth doesn’t have a debt problem. Estimated net debt in 2013-14 is $197.8 billion, or 12 per cent of gross domestic product – one of the lowest of the mature industrial countries. If Australia was a corporation, the directors (cabinet ministers) would be likely to be accused of running a ‘‘lazy balance sheet’’ and booted out by shareholders (voters).

There is no reason a government shouldn’t increase its debt if it has unemployed labour resources, growing unemployment, an absence of inflation and inflationary expectations, record low interest rates and – given wise governance – opportunities for investment where the social and economic return on the investment is higher than the cost of capital.

Debt is not a burden where it finances fruitful investment. Christians of the Catholic variety are well represented in the Abbott ministry. Even if they haven’t a feel for economics, they should be able to apply Christ’s parable of the talents, where three servants were given money to invest by their master. The servant who buried his money for safekeeping had it taken away and he was cast into the outer darkness.

The people cast into the outer darkness by this and future budgets planned by the Abbott government are those dependent on welfare. The impact of the budget on the victims is not only wicked but wasteful in that this budget is a brake on, rather than a boost to, the most vulnerable achieving their full economic potential.

This is not surprising. Over the six years of the Rudd/Gillard government the Coalition banged on about the increase in the burden of debt ($241 billion), in contrast to the 11 years of debt reduction ($140 billion) under the Howard government. Never mentioned in these diatribes was where the economy was in the business cycle, that the prime purpose of budgetary policy is to balance the economy (as distinct from the budget) in order to iron out potential destabilising booms and busts.

Prudent budgetary policy during the Howard years was to cut net spending. Also, some $80 billion of the debt reduction was a result of a massive privatisation program. These sales were offset by the fall in Commonwealth net worth. The reduction in public debt was offset by increased private debt to finance the privatisation purchases. The macro-economic impact was zero.

The Rudd/Gillard period coincided with the downswing in the business cycle precipitated by the global financial crisis – the worst recession since the 1930s Great Depression. It was necessary to pump up domestic demand to offset the collapse in private demand.

Without the net $40 billion a year pumped into the income-expenditure stream by the willingness of the Rudd/Gillard government to finance the spending by increasing debt, Australia would have experienced slower growth, higher unemployment and possibly recession, despite the boost to the economy from the mining boom generated by the Chinese export boom.

In terms of the impact on growth, inflation and employment, it is not the size of the budget surplus/deficit but the change in the budget surplus/deficit compared with the previous year that measures the inflationary/deflationary impact on the rest of the economy.

According to these criteria, the budget deficit in 2014-15 is one of the most deflationary on record. It will withdraw $20 billion from the income expenditure stream, compared with an injection of $31 billion into the income expenditure stream in 2013-14.

This is a massive deflationary turnaround of $51 billion in the impact of the budget on the economy (equal to a reduction of 3.2 per cent of GDP) – even after allowing for the fact that $9 billion of the debt reduction is due to the increase in Reserve Bank equity, which gives verisimilitude to the debt reduction number but subtracts nothing from spending.

The main macro-economic impact of any successful reversal by the Senate of proposed budget tax increases and expenditure cuts  will be to lessen the likelihood that the economy will be driven into recession by the full implementation of the budget.

We missed the GFC bullet. Will we get hit by a home-made bullet fashioned by our own neo-cons to give credibility to their debt lies?

Tony Abbott was clearly deflecting this week when he declared his job “is not to win a popularity contest”. It’s the kind of thing no democratic politician really believes, but which you must say in the face of catastrophic polling of the order presently dogging his government. For now the popular focus is on whether or not Abbott can recover; whether this will be the fortnight that ultimately relegates him to a single term. But in truth there are bigger questions here, and the Coalition faces a conundrum far tougher than merely figuring out how to win the next election. And it’s a conundrum created well before last Tuesday.

The reason the government broke so many promises in this budget is simple: the promises they made from Opposition were wildly contradictory. You cannot rein in deficits and abolish two major taxes, and replace one of them with a climate change policy that costs billions and promise no tax hikes and quarantine education, health, defence, public broadcasting and pensions from cuts. That’s like a weight-loss diet that does away with protein but promises no cuts to cake and lard! A platform like that was always going to have its day of reckoning.

The tragedy is that Abbott didn’t need to do it. He is the Prime Minister today because Labor had descended into an unelectable mess. Even Labor’s popular initiatives such as their Gonski education reforms and the National Disability Insurance Scheme never truly threatened his dominance. Abbott had the freedom not to promise a set of contradictions. He had the freedom to keep his options open and perhaps even to tell us some budgetary truth. But he didn’t. He told us budgetary fantasy as though he hadn’t given a moment’s thought to what would happen after the election.

Illustration: John Spooner

The result is that he brought the Coalition to government with a mandate for almost nothing. Repealing the carbon and mining taxes, sure. Stopping the boats by whatever militant means he could conceive, yes. Paid parental leave, arguably. But what else? Nothing on education, nothing on middle class welfare and especially nothing on industrial relations. In short, nothing that might help repair a budget in “crisis”, real or imagined.

The political calculation here is obvious. This was the tough, axe-wielding budget you get out of the way early in your first term, banking you will have plenty of time to win people back. But it’s not that simple anymore; not when the rejection is this emphatic. So fierce is the reaction that this budget can now only be an ambit claim. Any move Abbott makes from here must be some form of retreat.

So it’s not that the Coalition cannot be re-elected in 2016. It’s that now it can only be re-elected via a parade of sweeteners. Precisely what these could be is unclear. For John Howard it took the form of family benefits and tax cuts. Abbott has already trashed the former, and might find the latter difficult in the short term if he really cares at all about the budget. Whatever Abbott finds, it will go against the course he has charted so far. He can either persevere with his austerity reforms, or he can have hope for a second term. But it’s hard to see how he can do both.

Which means that Abbott might already have brought his government’s reform phase to an end. What industrial relations policy, for instance, could he possibly risk taking to the next election? How well placed is he to hold a mature debate on raising GST revenue? Indeed what Coalition-friendly reform ideas could he possibly find that will not merely reinforce the mould that has now firmly been cast in the public mind that his politics clearly favours the rich? Abbott simply has no political capital to spend on these things. And if he was unprepared to take anything approaching a contentious reform into an election he was certain to win, it is difficult to see him doing it when he is under electoral threat.

That’s a shame because there is no doubt we face serious budgetary and economic questions in the medium term. It’s a shame, too, because it gifts Labor a populist narrative in Opposition that won’t go anywhere near answering those questions. Labor need only rail against Medicare co-payments and petrol prices, now. And it knows it will be railing against a Coalition that has snookered itself. Abbott’s conduct in Opposition meant he came into government with little mandate. His conduct in government ensures next time around, he won’t be able to seek one.

Waleed Aly is a Fairfax columnist. He hosts Drive on ABC Radio National and is a lecturer in politics at Monash University.