This election isn't one that anyone would want to win. The global economy is uncertain, our debt is rising, and it seems we'll be relying on luck rather than management to avoid a recession, writes Ian Verrender.

It was hardly the kind of message an incoming Prime Minister would wish to hear.

Not long after he seized power late last year, Malcolm Turnbull met with senior econocrats to get a handle on the economy.

His meeting with Reserve Bank governor Glenn Stevens did little to inspire confidence. Business confidence had been shattered during the Abbott/Hockey era, he was told, business investment was abysmal, wages were all but stagnant and the terms of trade were collapsing.

This shouldn't have come as a surprise, for Stevens was traversing familiar ground.

For months he'd been issuing warnings to anyone who'd listen about the limits of monetary policy; that it was time for government to pull its weight. But the idea that the nation was on the cusp of a potential recession, particularly with a looming election, was confronting.

Turnbull quickly flicked the optimism switch to overdrive. There never was a more exciting time to be an Australian. We would transform from mining to something else via the magic of innovation. The economy was already well into the process of transition.

The rhetoric was fine. But that was as far as it went. While boosting confidence is important, it is no match for solid fiscal management. And so, in the process, the new Prime Minister missed a once-in-a-lifetime opportunity to seize the moment.

Australia's economy is at an inflexion point. The boom days are gone but the tax rorts and the spending remains. Clamping down, right when the global economy was slowing, would have been tough, painful even.

At that point, however, Australians were prepared to follow what appeared to be a dynamic leader, certainly an intelligent one.

For that brief period, had the brutal truth been outlined along with a plan - where the pain would be borne fairly - to fix the nation's finances, we may have been able to steer a course back to economic strength over the medium term.

Just as Paul Keating's "banana republic" call galvanised the nation, the electorate would have worn spending cuts and perhaps even a higher GST, had it all been balanced by closing the tax loopholes for the wealthy.

Strong leadership was required. What no-one realised was that Turnbull had signed away his freedom, that he was a captive of the factions that had installed him, that wanted no change, just a popular leader who could win an election and maintain their jobs.

At first, it appeared negative gearing, the capital gains discount and the exorbitant tax breaks for the wealthy via superannuation were all under investigation. But almost every policy, apart from superannuation, was jettisoned.

Incredibly, the Prime Minister now has become the great advocate of negative gearing and the capital gains tax discount, just to have a point of difference with the Opposition.

Rather than a grand vision for the nation and the economy, he has switched to an Abbott style three world slogan election campaign. Except that in place of the DDD (Debt and Deficit Disaster), we've reverted to the time-honoured BBH (Budget Black Hole) and now JAG (Jobs and Growth).

That's entirely understandable given the DDdebt has nearly DDdoubled since the Government came to power. No point reminding anyone of that. And Labor really doesn't want to go there either.

The one acronym missing from any political discourse, however, is the AAA, as in triple A credit rating. Each of the three major credit ratings - Fitch, Moody's and Standard & Poor's - has issued thinly veiled warnings that gold star rating is under threat unless action is taken to halt the deterioration in our fiscal position.

As Fitch's director of sovereign ratings, Mervyn Tang, said in an interview with Elysse Morgan on PM, Australia's triple A rating is safe, so long as all the expectations about growth released in the recent budget are met and there are no unforeseen domestic or international shocks.

That's a couple of mighty big ifs. For starters, the budget, now barely a month old, carries a series of assumptions that at this stage are looking hopelessly optimistic.

Iron ore last week was trading about $US10 a tonne below the estimate. Wages growth has slipped to its lowest since the last recession in 1992, to just 2.1 per cent in the March quarter, well below the 2.5 per cent budget forecast for the new financial year.

If that persists - and there is every indication it will - tax revenue will fall well short of forecasts and we will see yet another deficit blowout in the December half year update, as has become tradition.

Then there is the plunge in business investment. The March quarter figures, released last week, showed a whopping 5.2 per cent decline, far worse than expected.

The problem is that we don't have a balance sheet strong enough to cope with this kind of downturn. Australia historically has run large current account deficits, importing more than we export and financing the difference with debt and imported capital. That's a problem in this environment.

Government debt, meanwhile, continues to climb. It's now at $435 billion, not far off the $500 billion ceiling, which will soon require lifting, or perhaps even a second storey addition.

While our government debt is low by international standards, that's not the full story. Our total international debt clicked over the $1 trillion mark late last year and has continued to rise.

That's because our banks have been borrowing like drunken sailors offshore to help pump up the dangerously inflated Australian property market. Given the federal government now guarantees Australian offshore bank debt, that bank debt is a taxpayer problem.

Last week, the Reserve Bank calculated the guarantee effectively subsidised our big banks to the tune of about $4 billion a year because it allows our banks can borrow at cheaper rate.

That has a two-fold effect. First, it places even greater strain on the AAA rating. And second, if the credit rating is cut, mortgage rates would rise immediately.

Oddly, there has been nary a peep of this during the campaign. Instead, the Prime Minister is adamant that the best way to ease the deficit is to cut taxes to corporations and the wealthy; a counter-intuitive concept if ever there was one.

If this campaign has achieved anything, it has demonstrated the impotence of our political masters and just how beholden they are to the vested interests that deliver them to power.

Take the ludicrous debate over the proposed superannuation changes, announced in the budget. Rather than a retirement savings plan, superannuation has morphed into a tax effective wealth accumulation vehicle for the rich.

The changes, bold as they are for a Coalition Government and long overdue, will affect a miniscule proportion of the population. From now on, rich superannuants will only receive tax free earnings on balances of up to $1.6 million. Earnings on anything above $1.6 million will attract just 15 per cent tax.

The howls of outrage have been deafening. The usual lobby groups kicked into action, decrying the shift as retrospective. Except, no-one complained about the retrospective nature of Peter Costello's decision in 2007 to make it open slather for the rich, when he eliminated all income tax from retirement earnings.

And what about younger Australians, many with degrees and trades but no job security and no chance to buy a house, earning $60,000 a year? They pay tax. And it is their taxes that will pay for wealthy superannuants to live tax free in the palatial style to which they have become accustomed.

This election is not one that anyone would want to win. The next three years will be hard going. The global economy is uncertain and the chances of recession are rising. We will be relying on luck rather than management to avoid a recession.



Ian Verrender is the ABC's business editor and writes a weekly column for The Drum.