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A budget of tough choices facing Josh Frydenberg

But sometimes those choices can be problematic, such as the entire 2014 budget from which Joe Hockey and Tony Abbott never recovered. As the knight would have said, they chose poorly.

Now it is Josh Frydenberg’s turn to make important choices. The right ones could give Scott Morrison the strong platform from which to launch an election campaign that culminates in a Coalition victory.

The wrong ones, however, and the budget will be remembered as well as John Kerin’s one and only effort.

Deloitte Access Economics on Monday highlighted the difficulty of some choices facing the Treasurer.

Bringing forward the government’s second phase of tax cuts, that are not due to hit pay packets until mid-2022, seems a vote winner. That is until you realise that for about two-thirds of voters such a move would deliver just 20 cents a week.

Forget a sandwich and a milkshake tax cut. Twenty cents doesn’t even get you a red frog.

Apart from the policy choices, there are the things that must be done.

Money will have to be pumped into both the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission due to the findings of the banking royal commission.

While the cost of the current royal commission into aged care was set aside in the mid-year budget update, the 2019-20 budget has to contain funding for the planned royal commission into violence and abuse of the disabled.

The list of “vital” commitments in an election year is always long.

Then there are issues beyond the direct control of the Treasurer.

While the strong jobs market and higher commodity prices are going to boost the budget bottom line, the overall economic winds are turning against the government (and who ever wins the coming election).

We already have a taste of what that might mean.

The Reserve Bank used its February monetary policy statement to downgrade many of its forecasts, from GDP to the terms of trade.

The RBA’s forecasts are rarely that different to those compiled by the Federal Treasury. At this point, the Treasury’s latest forecasts are looking much rosier than those out of Martin Place.

Treasury has little option but to slice its prediction for growth while its forecast around household consumption (growing by one per cent this year compared to the RBA’s recent prediction of a 0.7 per cent contraction) will also be cut.

More problematically, Treasury – as it has for the past half decade or so – will have to cut its wages forecast. It’s not such a problem for 2018-19, but it has pencilled in 3 per cent growth for the coming financial year.

The Reserve Bank has wages growth at 2.5 per cent with no real lift beyond that. Given how Labor wants to talk about wages growth, the government’s own figures will simply confirm that without a huge policy move nothing is going to change.

Financial markets put the chance of an interest rate cut on budget day at slightly better than one in 10. The same markets reckon the official cash rate will be at 1.25 per cent by August and down to one per cent by early next year.

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Together, that means Josh Frydenberg has to explain tax cuts and an associated election spending is affordable right now while also conceding the economy is facing some serious challenges.

He will have to do that explaining right through an election campaign given the budget will be the government’s re-election policy framework.

And two days after Frydenberg lays out his vision, Shorten will be able to cherry pick elements of the budget – such as any increase in revenue – and use that for his own election promises.

Whether the Treasurer chooses wisely or poorly for his first budget will go a long way to determine what choices voters make.

Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.

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