Grattan on Friday: Two sets of numbers a headache for Malcolm Turnbull

Having landed the innovation statement on a cloud of optimism, the Turnbull government faces some character-forming days in the coming week, as the Ian Macfarlane saga plays out and the budget update is released. We are talking about vastly different issues but each is a big deal.

The pocket version of the Macfarlane story is that the former industry minister, dumped by Malcolm Turnbull, proposes to switch from the Liberals to the Nationals, which would enable the latter to demand an extra cabinet spot and Macfarlane, barring hitches, to stage an extraordinary return.

Macfarlane probably didn’t anticipate the trouble he would cause and the backlash against him. Many Liberals are furious, accusing him of trying to game the system. Some Nationals are doubtful, seeing him as a queue jumper.

Deputy Prime Minister Warren Truss, expected to step down from the Nationals' leadership early next year, has been caught between his responsibility to his party and his obligations to the Prime Minister, whom he did not forewarn.

Turnbull faces a very difficult situation if the plan goes ahead, and bitterness from the Nationals if it is aborted.

On Saturday Macfarlane’s local electorate organisation will consider his move. Unless a lot of feet become cold it is expected to approve it.

Assuming that happens, the crunch comes on Monday when the executive of the Queensland Liberal National Party meets. Sources say the numbers are tight, and that’s before last minute arm-twisting. Turnbull will be represented at the meeting by Immigration Minister Peter Dutton.

If the vote goes against Macfarlane he will be humiliated personally, and the Nationals will be open to the charge of engaging in a hicks' plot that they could not even bring off. How could Macfarlane walk back into the Liberal party room in Canberra? There is speculation that in those circumstances he might quit, causing a byelection.

If Macfarlane has the numbers on the executive, Turnbull has a serious management problem. The Nationals have indicated they will push for their extra cabinet place - which actually they are already entitled to on existing numbers. However Turnbull wouldn’t want a quick reshuffle, unless he decided to rid himself of the embattled Mal Brough, also a Queenslander. But hanging onto Brough this long and then, before the police report, axing him just to address another matter might look a touch too expedient.

A reshuffle could be delayed until Truss goes from the leadership, assuming he does. But would Turnbull seek to veto the Nationals nominating Macfarlane, accepting only some other National?

A potential upheaval in Coalition relations is a worry for a prime minister, but the poor state of the budget is obviously a greater one. The books will be opened on Tuesday (unusually in Perth, because Finance Minister Mathias Cormann is about to become a father for the second time).

The mid-year economic and fiscal outlook (MYEFO) will be grim. The May budget forecast of a $35 billion 2015-16 deficit is set to worsen. Chris Richardson of Deloitte Access Economics estimates the updated forecast is likely to be more than $40 billion, with budget deficits in the four years to 2018-19 totalling $38 billion more than expected in May.

There will be further revenue write downs, driven substantially by China’s slowing growth, with low iron ore prices, and record low rates of wage growth in Australia.

The government promises to cover new spending with savings, so there will be cuts. The innovation statement spends $1.1 billion over four years – the trade offs will not be itemised but will be spread across government. There could be savings due to underspends but some cuts are likely to bring squeals.

MYEFO will shine a light very specifically on the prospects for revenue, and the credibility of the government’s rhetoric about containing spending, one measure of this being whether outlays are being reduced as a proportion of GDP.

Budgets and their updates always have to be watched for their fiddles – such as what “savings” that haven’t been legislated by a difficult Senate, or indeed will never be legislated, are kept in the numbers.

The prospect of a surplus has disappeared over the horizon. A government that came in only a couple of years ago talking debt and deficit and proclaiming a budget emergency (the existence of which many disputed) displays little will for a robust approach. The slogan was discarded after serving its political purpose.

It’s unsurprising the government doesn’t want to be tied to a timetable for returning to surplus. Labor treasurer Wayne Swan provided a lesson in the risks of that. But without the discipline of a date, the temptation is for ministers to get rather lax. The psychology is that the marginal extra “spend” can actually face less resistance when there is a big deficit, according to sources familiar with budget processes. But the “saves” are becoming harder to find. Economic observers will want to see at least a pathway towards surplus.

MYEFO shows us some of the foundations for next year’s budget. It is presented by Treasurer Scott Morrison – his first test in this area - and Cormann but it will focus attention on the economic strategy of the government and thus of Turnbull.

Accepting Turnbull’s word that the election will be around the due time – which is September – his government will have to bring down a 2016 budget in testing circumstances. It has minimal money for giveaways, yet it will need some inducements for the voters.

Around Christmas, Turnbull celebrates his 100 days in office. The messages from next week will be that the next 200 are almost certainly going to be a lot tougher.