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GFC changes the game.

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Senator the Hon Helen Coonan Shadow Minister for Finance, Competition Policy and Deregulation

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The global recession is a game changer both globally and locally.

Government intervention in the market to prevent the collapse of “too big to fail” institutions or to stabilise financial markets has become a distinguishing feature of the global financial crisis and the global recession.

Although orthodox thinking dictates that non viable institutions should fail as a necessary adjustment in a well functioning market economy, the risk of systemic failure in the global financial system has led to a level of government intervention across the globe that has not been seen or anticipated for decades.

While such interventions have restored stability to some degree, this has come at a cost.

And it can set dangerous precedents for when the economy returns to ‘normal’, whenever that may be.

In the United States, President Obama’s conditions for the proposed bailout of car manufacturer Chrysler is a case in point. Banks are being cajoled into forgiving debt and unions are being awarded a chunk of the company in recognition of the risk to their pension plans. The rearrangement in ranking of creditors both secured and unsecured required to deliver this deal turns established legal principle upside down.

Moral hazard aside, while short term fixes may be necessary, even justified, as an industry teeters on the brink, the consequences for investors, banks and hedge funds of changing the rules fundamentally, will result in uncertainty and a lack of confidence in the longer term.

In Australia, a series of aggressive interventions by the Rudd Labor Government in almost every corner of commercial and corporate life will have profound and lasting effects.

From wholesale and retail guarantees to banks, guarantees to state and territory governments and guarantees to “Rudd Bank”, the Rudd Government has thrown money at underpinning the business of banks, the car industry and commercial property developers. And in a desperate attempt to salvage some sort of broadband network from the embers of its failed and undeliverable election promise to deliver a fibre to the node national broadband network, the Government is now flinging $43 billion and counting at yet another bigger and grander, back of the envelope “plan”, that is both risky and reckless in equal measure.

The contingent liabilities for Mr Rudd and Mr Swan’s forays into corporate adventurism are currently running at around $1 trillion. So far, questions about Australia’s AAA credit rating have just been mutters, but sooner or later, Mr Swan is

going to have to exit the Government from its role as Protector in Chief of large financial organisations.

Even more pressing is how Mr Rudd and Mr Swan can credibly explain the rivers of red ink that will flow in next weeks Budget.

On even the most favourable construction, the sugar hit cash handouts that have added to the deficit did not work. Jobs were not saved and any benefits have been fleeting. As the International Monetary Fund’s Chief Economist Olivier Blanchard said last month, cash giveaways will only work if spent.

Blaming the global financial crisis and the slump in revenue as the exclusive drivers of what is shaping up to be the largest deficit in Australian history, doesn’t cut the mustard.

The Budget will give Mr Rudd and Mr Swan an opportunity to convince an increasingly sceptical public how “temporary” the massive deficit will be, and how the Government proposes to bring public debt and spending under control.

What “normal” will look like post recession must be worked on now.

Australians are entitled to expect a realistic forecast of when public finances will be brought back into the black and at what interest cost. When will the debt racked up by the Rudd Labor Government be reduced and when can we expect to see a Budget surplus? The “return to trend growth” yardstick won’t wash when it relies on Treasury forecasts that are subject to large margins of error. There have been two substantial revisions of the forecast since the last Budget.

Whatever the explanation they come up with, Labor has now comprehensively forfeited its claim to fiscal conservatism.

True to form, “RuddCon” has morphed into the familiar Labor modus operandi - out of control spending and a legacy of debt for future generations of Australians to face up to.

The global financial crisis and reduced revenue notwithstanding, in less than a year, Mr Rudd has squandered Australia’s strong public finances built up over more than a decade.

With nothing concrete to show for such excessive spending, future generations of Australians will want to know why they have been left to pay for the Rudd Recession.