The day Malcolm Turnbull replaced Tony Abbott as prime minister last September he promised a different style of leadership. One that "respects people's intelligence", explains complex economic issues, and then sets out a course of action.
If Turnbull's soaring opinion polls are any guide, voters liked what they heard.
But there's been a jumble of mixed economic policy messages ever since. A tax mix "switch" involving a hike in the GST and income tax cuts was floated but later dumped. A proposal to transform the federation by allowing the states to raise income tax fell flat. A move on "excessive" use of negative gearing was hinted at but eventually withdrawn.
Tuesday's budget is an opportunity for the government to reboot.
But that's a tough assignment for Treasurer Scott Morrison.
His first budget needs to make a statement about what the Turnbull government stands for. It must show he's got a credible plan to balance the Commonwealth's books. And with an election due in eight weeks, it needs to woo voters. All that as the economy's lumbering post-mining boom transition bleeds the federal coffers.
"It ranks as a triple pike and dive in terms of degree of difficulty," Deloitte economist and former Treasury official, Chris Richardson, said.
Election-year budgets are always crucial for incumbents but Turnbull's decision to go to the polls on July 2 means this one will be unusually close to polling day. Any missteps could have more impact at the ballot box than usual. A prudent budget that makes sensible, fair reforms might not cut it. With opinion polls showing the Coalition and Labor neck and neck, the Turnbull government needs something special.
But like Wayne Swan and Joe Hockey before him, Morrison is finding out how fiendishly difficult it can be to govern when your revenue keeps collapsing. Unlike the mining boom years when Commonwealth revenue repeatedly "surprised on the upside", we are now in a phase that Richardson describes as "budgeting hell".
Deloitte Access Economics warned on Tuesday that weaker tax collections and new spending means the government's budget position over the next four years has deteriorated by $21 billion since the last budget update in December. While a recent rally in the iron-ore price has provided some relief, the report said, broader economic trends, such as anaemic wages growth, are doing "few favours" to the federal coffers.
"If you thought the long nightmare of revenue write-downs has finally run its course, then you'd better keep hiding under a blanket – or risk some disappointment," it said.
The two budgets handed down by Hockey cast a shadow over Morrison's first. The politically disastrous attempt at fiscal repair in 2014 forced Hockey to deliver a more voter-friendly budget last year in a bid to restore the faith. It had the trappings of pre-election budget served up early.
Last-minute surprise
The Treasurer got a late budget curveball on Wednesday when Bureau of Statistics figures showed Australia had recorded its first quarterly fall in the consumer price index since the global financial crisis.
The drop may be a one-off, but a sustained period of falling prices – called deflation – would have a dampening effect on the economy because it discourages spending as both consumers and businesses hold off in the expectation of lower prices in future.
The inflation result triggered speculation that the Reserve Bank Board, which will meet a few hours before Morrison delivers the budget, might cut interest rates and steal the show. The annual inflation rate fell to 1.3 per cent in the March quarter and has now been below the Reserve Bank's 2 per cent to 3 per cent inflation target for 18 months. Separate figures released during the week showed a worrying pre-budget drop in consumer sentiment. The National Australia Bank is one of several financial institutions forecasting the Reserve to reduce rates by 0.25 of a percentage point to a historic low of 1.75 per cent next week.
The prospect of a rate cut drawing attention away from Tuesday's budget is not the only headache for Morrison from the surprise fall in consumer prices. While it is unclear how much this week's CPI number will factor in the budget's forecasts, super-low inflation is yet another bad sign for government revenue.
"It means the government needs to tread very carefully," AMP capital chief economist Dr Shane Oliver said. "It can't push down the path of raising taxes too much nor can it push down the path of cutting spending too much because then you would run the risk of making things worse."
Richardson said the quarterly drop in the CPI was "a genuinely ugly number", that challenged both the Reserve Bank and the federal Treasury.
Deficit in the spotlight
A constant Morrison refrain is that the government must "live within its means." But some analysts fear the Commonwealth is likely to be in the red until well into the next decade. The last federal surplus was back in 2007-08, meaning Morrison's first budget will chalk up the ninth federal deficit in a row.
That has drawn the attention of credit ratings agencies. Earlier this month the global rating firm Moody's warned that Australia's triple-A credit rating could be at risk if Morrison pursues only limited spending cuts and doesn't do much to collect more tax. That contradicted the Treasurer's claim that Australia has a spending problem rather than a revenue problem.
Oliver said losing the AAA rating would be a huge blow to national pride.
"The symbolism would be, to some degree, that we have lost our way," he said.
"So, obviously this government does not want to lose the rating on their watch given their claims to superior budgetary management. It is a very difficult balancing act."
An added complication for Morrison is that the timing of the election means a separate, independent assessment of federal finances called the Pre-Election Economic and Fiscal Outlook (PEFO) will be released soon after his budget.
The PEFO is prepared by the secretaries of the departments of Treasury and Finance – without the interference of politicians – and must be published 10 days after the election writs are issued.
Deloitte's Richardson this week made a public appeal to the bureaucrats who prepare PEFO to be blunt with voters about the Commonwealth's budget problems. He claims the last PEFO, released prior to the 2013 election, was too cautious.
"Treasury and Finance can stick their heads in the sand again, thereby ensuring the electorate does the same," he said.
"Or ... they can tell it like it really is to all Australians ahead of the election ... Life hands you a handful of moments to stand up and be counted. For the authors of PEFO, this is one of those moments."
The prospect of a hard-headed independent update on the state of the federal government's books within weeks is yet another constraint on Morrison's high-pressure budget.
Leadership gap
As the electorate's ardour for Turnbull has cooled in recent months, the government has been criticised for responding to economic policies released by Labor rather than arguing the case for its own.
Morrison's opposite number, shadow treasurer Chris Bowen, claimed in a newspaper column this week that Labor "has led the tax debate" for the last year.
"Here we are, less than a week out from the government's last budget, and with a July 2 election looming, and the Prime Minister has no economic or tax policy of his own to argue for," he wrote. Opposition Leader Bill Shorten has sought to differentiate Labor's fiscal strategy with the slogan "budget repair that is fair".
Tuesday's budget is an opportunity for the government to recast the economic debate.
This week Morrison singled out three "important tasks" the budget would seek to achieve. First, promote "jobs and growth" as the Australian economy continues to make a transition following the mining boom. Second, make "sustainable" changes to the tax system. And, third, outline a path back to a budget surplus.
On Friday the Prime Minister announced a multibillion-dollar "smart cities" infrastructure plan. The scheme will include "innovative financing approaches" such as very long-dated bonds – possibly for up to 30 years – to be detailed in Tuesday's budget.
Labor has already announced plans to reduce superannuation tax benefits for high-income earners, to lift cigarette taxes and closing loopholes used by multinational corporations to reduce tax. The indications are that Morrison's budget will move the Coalition closer to Labor in all three of those policy areas.
The government is also expected to introduce modest personal income tax cuts to diminish the effects of bracket creep – when wages growth gradually pushes more workers into higher tax brackets. Those measures are likely to benefit middle and high income earners most.
It is possible Morrison's first budget will do a better job than its recent predecessors at balancing the Commonwealth's revenue challenges with new initiatives to promote jobs, growth and equity.
But given the stakes, will that be enough?
