- The Washington Times - Tuesday, January 29, 2008

MELBOURNE, Australia — A new left-wing government in Australia has begun with a decidedly unliberal approach to economic policy — proposing a budget based on deep cuts in spending and taxes.

U.S. officials, who are headed in the other direction with a stimulus package likely to increase the federal deficit by at least $100 billion this year, had their first chance to hear about the novel Australian approach to the recent global economic turmoil during a first visit to Washington yesterday by Australian Foreign Minister Stephen Smith.

Mr. Smith had meetings with Vice President Dick Cheney, Secretary of State Condoleezza Rice and Defense Secretary Robert M. Gates before attending the State of the Union address.

The Australian plan, announced Jan. 21 by Labor Prime Minister Kevin Rudd, was based on the assumption that a 3.8 percent inflation rate — rather than slow growth — was the greatest threat to the nation’s economy. It calls for spending cuts sufficient to produce a surplus equaling 1.5 percent of gross domestic product — even as the government goes ahead with promised tax cuts totaling $27 billion over four years.

The fiscal belt-tightening goes far beyond anything envisaged by the previous right-wing government of defeated Prime Minister John Howard — a staunch U.S. ally for more than a decade — or for that matter by U.S. governments since the 1990s.

“We are embarking on a hard-line approach to fiscal discipline,” Mr. Rudd said in announcing the plan last week. “It won’t be easy.”

In addition to $8.8 billion in savings the party identified during the campaign, the prime minister said the new government will turn to its “razor gang” to find more spending cuts.

He said his Labor Party government will also look for ways to encourage private savings and tackle a chronic shortage of skilled labor.

No sooner was the plan announced than it hit an unexpected bump in the form of the global market downtown that knocked about $100 billion off the value of the Australian stock market in recent days. Shares recovered somewhat Friday and markets were closed yesterday for a national holiday.

Nevertheless, financial analysts expect an increase in interest rates when the Reserve Bank of Australia meets in early February. At present, the Australian rate is 5.75 percent, against 3.5 percent in the United States, and is expected to go to 6 percent.

The hope is that the higher rates will attract foreign capital and strengthen the Australian dollar, which in turn would help with inflation by reducing the cost of oil and other imports.

Mr. Rudd and Treasurer Wayne Swan have been pointing the finger of blame for economic concerns squarely at the defeated Liberal- National coalition led by Mr. Howard.

Their favorite quote is from the outgoing treasurer, Peter Costello, who said six months ago that inflation “is currently right where we want it.”

The comment is being thrown in the face of the opposition at every opportunity as Labor argues that the Howard government ran a slack budget policy and failed to invest in skills and infrastructure and lift work-force participation in the economy.

But the Labor government is also stuck with an election pledge to cut taxes by $27 billion. Mr. Swan said this will entice 65,000 more people into the work force but, at a cost of more than $415,000 a job, it is being called the most expensive jobs program in the nation’s history.

Mike Steketee, columnist for the Weekend Australian, wrote, “Despite its best efforts, the Rudd government to a large extent will be hostage to outside economic forces. It may be lucky with the slowdown in the United States doing no more than take the sting out of growth in Australia, thereby easing the pressure on interest rates.

“A recession in Australia would be a different story.”

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