“This challenge is political as well as economic”: Hockey’s 2014 Budget Photo: Alex EllinghausenAs the storm clouds gathered in 2008, Labor was told to spend the lot.

“Go early, go hard, and go households” came the now famous advice from Treasury. It was like a licence to become popular.

This week, with the clock ticking down to the Coalition’s first crucial budget, there was another piece of advice kicking around. Former Treasury official and now director at the firm Macroeconomics, Stephen Anthony, urged Joe Hockey to “cut early and cut hard”. Not quite as pleasant perhaps, but equally clear.

Anthony went on to say, “there will never be a better chance than now to fix the budget”.

It has been rather hard to get an accurate read on the government’s pre-budget positioning given that through the earlier part of this year, Hockey has at times flagged a mild, even stimulatory budget, rejecting any sudden contractions that would “undermine improving economic growth in the budget”.

“We’re not going to do that. We want the economy to grow faster, to give people more jobs. That’s what we want,” he said last month.

If there is any confusion in voters’ minds, it is because Hockey is planning a budget which does both – stimulate now and cut later – which will be a pretty neat trick if he can pull it off. The pitch involves convincing people that cutting is the new spending – the only lever left to governments across the developed world.

Monetary policy has no leeway left in it with the cash rate already at rock-bottom. Ditto for fiscal policy with the Commonwealth’s balance sheet, like so many countries, already heavily in the red ruling out significant new spending.

His answer? Structural reforms aimed at trimming costs and bridging the remaining fiscal shortfall with new activity making for new revenue. Or as Hockey put it this week: “Real reforms to our economies in order to lift the overall level of growth and therefore everyone will benefit”.

In the frame are the projected growth rates of several massive expenditure programs – some of which will start to really bite into the budget towards the end of its four-year cycle and beyond – the national disability insurance scheme, the promised return to 2 per cent growth in real terms of defence spending, and increased Commonwealth expenditure on school education.

Along with the burgeoning bill for health and the aged pension, these things add up to a worsening structural deficit – a permanent and widening gap between what we raise in tax revenue and our fixed costs every year.

Treasury boss Martin Parkinson nailed the problem a fortnight ago noting that the NDIS and “Gonski” school reforms will add $3.1 billion and $2.8 billion to total spending over the forward estimates. But it’s beyond that four-year period that the costs really begin to gallop with the NDIS rising to be $11.3 billion annually in 2023-24.

“What is less well understood is that total Commonwealth expenditure on health is anticipated to rise from $64.7 billion in nominal terms to $116 billion in 2023-24,” he told the Sydney Institute.

“Similarly, our three main pension payments – the aged pension, disability support pension, and carers’ payment – grow at an annual rate of 6 per cent per annum in nominal terms over the forward estimates, adding around $13 billion to annual payments by 2016-17, and another $39 billion by 2023-24.”

Anthony estimates the task of making the budget sound again will necessitate phased but nonetheless rapid spending cuts equal to $16 billion a year – that is a permanent reduction in fixed outlays of around 1 per cent of GDP.

Clearly this challenge is political as well as economic.

Tony Abbott has made it clear he intends keeping his promises – all of them, with no exceptions.

Yet there are strong signals that the aged pension, about which he made an ironclad promise of no change before the election, is to be trimmed. Choices on the table include a lower indexation arrangement, a new assets threshold involving the family home, and delaying the eligibility age to 70.

There is also speculation that some taxes will be increased, and middle-class welfare cut – Family Tax Benefit B in particular – as well as other welfare supplements.

Abbott knows many of these changes can only commence after 2016 if he is to keep his promises, giving the electorate a chance to cast judgment.

But to many voters, it will feel like betrayal anyway.

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Hockey’s new trick: cutting is really spending