Before the federal budget release next week, Treasurer Jim Chalmers has been managing our expectations.

He sees some dark clouds on the economic horizon: Inflationary pressures, more unemployment, declining living standards, rising interest rates and, if we’re not careful, a real recession.

According to Dr Chalmers, the best strategy for weathering the coming storm is “responsible budgeting” – which means limiting public spending to bring down the deficit.

But by all but ruling out substantial changes to the stage-three income tax cuts, the Treasurer appears to be ignoring his own warnings about the need to be prepared for a global recession to hit Australian shores with full force.

Why deficit reduction might be the solution to our problems is never entirely clear. It simply seems to be the way that Labor thinks it can maintain the always-elusive “confidence” of financial markets.

One prominent fear is that government spending will add fuel to the inflationary fire, which would only encourage the Reserve Bank to implement more of the interest rates hikes that are hurting mortgage holders.

But we all know, and so do Albanese and Chalmers, that inflation is being driven by supply side interruptions and widening corporate profit margins.

And while the government cannot do much about the former at short notice, there are ways to restrain the latter – the government just isn’t very interested in that option.

It’s a little like worrying about someone lighting up a cigarette when your house is already ablaze – it’s the wrong thing to focus on.

A prominent fear is that government spending will add fuel to the inflationary fire. Photo: Getty

Another concern that economists typically have about public spending has to do with the possibility that public spending and borrowing may “crowd out” private investment.

But we are not in a situation of vibrant growth that government spending would be pushing back against.

Indeed, one of the main worries of our time is that it seems almost impossible to get corporations to invest in projects that generate actual economic and productivity growth instead of borrowing to fund stock buybacks and other self-enrichment schemes.

Public expenditure can be “investment” rather than “consumption”, and in fact it’s sorely needed.

Lastly, will the international financial markets refuse to fund our deficit? This is a more interesting question. Treasuries of Western governments typically do not have much difficulty financing deficits.

But there are limits to this, which were evidenced in recent weeks by the market response to the UK government’s attempt to borrow heavily just to give tax breaks to its core constituency of the already wealthy.

Such limits may become more pressing in the near future, as the co-ordinated actions of the world’s central banks are pushing up the cost of public debt.

But if it’s easier to sympathise with Chalmers’ concerns on this score, that only makes all the more baffling the government’s reticence about reconsidering the stage-three tax cuts.

To get a sense of the significance of this, some numbers are helpful. The government is committed to rejigging infrastructure priorities while staying within an existing $10 billion “envelope”.

At the same time, it is leaving an enormous package of $244 billion in tax cuts for high-income earners sitting, unopened, on the kitchen table.

The combination of exaggerated deficit fears and refusing to cancel a package of tax reductions ordered by the previous government works to constrain long-term government spending plans in pernicious ways.

The consequences of such self-imposed austerity will become more apparent if the Treasurer’s warnings about global economic headwinds come to pass and Australia ends up facing its first real recession in over 30 years.

Yes, technically Australia had a recession in early 2020, when pandemic lockdown orders shuttered a large chunk of the economy. But public health concerns meant that no one blamed the government for the downturn.

The Coalition government and the Reserve Bank enjoyed tremendous political space to provide all the spending and liquidity needed to keep the economy on life support.

It is hard to see a similar window of political immunity opening for the Labor government should another recession hit.

Instead, it will need to act creatively, finding ways to buffer the Australian economy from the worst effects of a recession that is being engineered by the Reserve Bank, in tandem with central banks around the world.

In this environment, proceeding with tax cuts for high-income earners is a serious miscalculation.

The government knows the stage-three tax cuts are bad policy, but does not want opposition cries of “broken promises” to derail its first term in office. But after 30 years, the political class may have forgotten that recessions are not kind to incumbent governments.

As it finalises next week’s budget in what is a fast-moving global economic situation, the Albanese government should weigh up the political risks of abandoning tax cuts with the political risks of going into a recession with much of its anti-recession firepower already spent.

Martijn Konings is Professor of Political Economy and Social Theory at the University of Sydney

Gareth Bryant is Australian Research Council DECRA Fellow at the University of Sydney