One of the key economic policy battles in the first term of any government is to shape the public’s understanding of the previous government. Howard and Costello successfully associated the Keating and Hawke governments not with a massive program of economic liberalisation, but with “Beazley’s black hole,” a supposedly hidden fiscal deficit that was used to justify sharp spending cuts. The first Rudd government could and should have made more of Howard’s failure to make the most of the mining boom, squandering much of the benefit in unsustainable tax cuts, but they failed to ram this message home.

The new government’s intention is, quite clearly, to focus on the debt accumulated by Labor. Rudd, Gillard and all the rest spent too much, racked up too much debt, and have too little to show for it. We’re now seeing a full-court press on this issue.

Maurice Newman, who is expected to head Tony Abbott’s Business Advisory Council, has an op-ed in the Fin today making this case. He points out that gross debt has risen quite a bit, and suggests we’re vulnerable to a downgrade to the nation’s AAA credit rating. He points to the government bond yield as an indicator of the threat facing the nation’s finances:

The yield to maturity of Australian five-year bonds is 2.84 per cent and compares with Canada, a reasonable proxy for the Australian economy, at 1.18 per cent. It should be noted that Canada has withdrawn its stimulus and its debt is expected to fall between 2013 and 2015.

This is one of those statements that is perfectly true, yet utterly misleading. Australia’s government does have to pay more to borrow money than the Canadian government. Yet that has pretty much always been the case. Here are the bond yields of the two governments since 2004:

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Newman’s story is that Australia’s extravagant spending poses risks to the nation’s fiscal future, to which investors have responded by demanding the Australian government pay higher interest rates than comparable governments. If this story were true, you’d expect to see the yield on Australian government bonds rise relative to those of “reasonable proxy” economies like Canada. In the jargon, you’d see wider spreads in the bond yields. That’s not what the data shows.

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The yield on Australian government bonds is about 1.4 percentage points higher than the yield on Canadian bonds. On the last day of the Howard Government’s term in 2007, it was 2.4 points. The average spread over the period between January 2004 and November 2007 was 1.7 points. So if this spread can be taken as an indication of investors’ fears about Australian government budgets, as Newman suggests it can, then investors were quite clearly more worried back in the Howard days than they are today.

Whoever wins the Labor leadership, in my view the worst thing for him or her to do would be to capitulate to this attack on the Rudd/Gillard record and repudiate the stimulus packages.