Gillard's main fight lies ahead

Julia Gillard in Canberra this week after returning from her overseas visit to face calls for an economic reform agenda. Picture: Ray Strange

THE Labor Prime Minister must dominate the reform agenda.

JULIA Gillard told the world this week that "foreign policy is not my passion", but this merely raises the biggest question in Australian politics: does Gillard have a passion for economic reform?

Gillard can survive short of imposing herself in foreign policy with Kevin Rudd-type passion but she cannot succeed as Prime Minister without stamping her authority, strategy and priorities on economic policy.

After her 100-plus days in the job Gillard has not met this test. Yet Labor needs an ambitious second-term economic agenda to brand itself against both the Greens and the Coalition. It is a political and economic necessity. Can Julia step up to the plate?

The focus on the hung parliament cannot disguise the shifts under way: the economy is operating close to capacity; the Reserve Bank warns it will impose discipline via interest rate increases; the business community, increasingly worried, has decided to speak out; the Treasury and Finance departments have called for more aggressive reforms; a left-leaning ACTU is ready to play with the Greens to penalise Labor; and on the ground popular discontent with power prices is about to become a political firestorm.

There is only one response to these intense and conflicting forces: Gillard must operate from strength or she will be torn apart politically. The worst mistake Labor can make is to hedge its bets, stay static, engage in spin and pacify the political groups that sustain its minority government. This is the natural reaction, dictated by Labor's minority status and focus group techniques. If embraced, it will be the road to Labor's ruin.

Retired finance minister Lindsay Tanner gave the party advice in his 2009 John Button Lecture pertinent to present events. Tanner said: "Labor cannot survive for long as a negative political force. Our rejection of the instinctive neo-liberalism and social obscurantism of the conservatives will win many votes. Our rejection of the one-dimensional zealotry of the Greens will win many more. But without a central positive theme that expresses our core political mission, we won't survive in the longer term."

The failure of Rudd's first term was his inability to define the Labor brand in a new age. This failure was disguised by Labor's successful response to the global financial crisis. At the 2010 election, Gillard campaigned on Labor's record in avoiding recession. Yes, this was an impressive achievement but an ungrateful and unimpressed public almost threw Labor out of office for Tony Abbott. Anybody who denies the crisis of meaning and intellect facing Labor is fooling themselves.

Labor now faces a new battle: it fights the Abbott-led conservatives on the Right and the Greens on the Left. It was Rudd's failure to manage this battle on two fronts that destroyed his leadership. It will destroy Gillard's leadership unless she produces the solution that eluded Rudd.

Labor's problem is that it looks weak compared with the Greens and the Abbott-led Coalition. Three years of looking weak is a certain death warrant. John Howard used to say the voters expected him to deliver even when he didn't control the Senate. So the voters will expect Gillard to deliver even though she doesn't control the House of Representatives or Senate.

The moral: minority government is not an excuse. This slogan should hang on the wall of every Labor cabinet minister.

Rudd and Gillard, both elected to parliament in 1998, symbolise a new Labor generation. Neither was in parliament when Bob Hawke or Paul Keating were MPs. Neither was shaped by the reform struggles of the 1980s and 90s and the quest to save Australia from economic stagnation and depressed living standards. While clever and diligent, neither has been able to invest this present Labor government with an over-arching sense of mission.

Labor's history is stark. You may applaud or disapprove, but the self-declared purpose of past ALP governments was manifest: the Curtin-Chifley mission was to win the war and administer post-war reconstruction; the Whitlam mission was to modernise the nation after 23 years of conservative rule; the Hawke-Keating mission was to reinvent the national economy; and the Rudd-Gillard mission is to (fill in the blank space)?

The constant question asked now is: how long will Gillard's government last? If you answer "probably three years", this is interpreted as the definition of success. But that's a false interpretation and represents the triumph of tactics over strategy. The risk for Gillard, a skilled negotiator, is that she manages the tactics of the hung parliament but fails its strategic challenge.

Treasury has been frank in describing the challenge, advising Labor "full capacity" will be reached "over the next year". This means an inflation risk fed by the resources boom, strong job growth and high business investment. It warns, but in more polite words, about the danger of populist political rorts. It believes a prudent government would "take further steps" to bolster the return-to-surplus deadline. Treasury says future reforms must be budget-neutral, always a hard task. Many of the policy challenges ahead can be solved only by "use of markets or market-based mechanisms". In this situation Treasury says strong population growth will continue, tax reform is needed to shift the burden more to resources and consumption, a carbon price is essential to reach the 5 per cent emission reduction target by 2020, the labour market must be competitive, "significant risks" surrounding the National Broadband Network need to be addressed and productivity should be enhanced by market-based reforms in energy, transport and communications.

The Finance Department warned its new minister, Penny Wong, about the "decline in confidence in the ability of governments to deliver programs and address Australia's future needs". This is, without question, the view of business. There is only one interpretation of the department's warning on fiscal constraint: it thinks ministers don't grasp what is involved. It suggests cutting growth in defence spending, forcing the better-off to pay more for health and aged care, toughening up welfare payment eligibility, getting the disadvantaged into jobs and cracking down on superannuation concessions and pharmaceutical benefits.

No government would embrace all such options from Treasury and Finance. Nobody expects that. The real point is that Labor needs to adopt such an economic reform strategy this term. It needs to display conviction, offer a narrative and sort out its priorities. Gillard needs to lead, not be led by the Greens, independents and Coalition exploiting a policy vacuum.

The essential task falls under the heading of supply-side reforms based on market mechanisms - the approach that Labor distrusts and shuns - yet any failures will be measured by higher interest rates than otherwise imposed by the Reserve Bank.

Last month the head of the Business Council of Australia, Graham Bradley, signalled a stronger profile from business, calling on Labor to prosecute a reform agenda. This week the message from The Australian and Deutsche Bank Business Leaders Forum was obvious: business wants action on tax, infrastructure and productivity, and it is getting alarmed about Labor's industrial relations re-regulation.

The opposite message came from new ACTU president Ged Kearney with her lament that "over the last 20 years" Labor has "shifted ground" and alienated its union base. She said in some aspects of industrial relations the Greens had superior policies to Labor, surely a historic declaration, as she highlighted industry-wide bargaining and abolition of the Australian Building and Construction Commission. This reactionary culture now pervading much of the unions only accentuates the pressures on Gillard.

But there is worse coming. The open letter in Sydney's The Daily Telegraph yesterday should send the chill down Labor's spine. So should the tenor of Sydney talkback radio this week. The Telegraph launched its campaign against rising electricity prices, claiming they constitute the biggest strain on household budgets. It declares electricity "as an essential service, not a luxury" and demands that NSW Premier Kristina Keneally fix the problem.

This campaign can easily be re-directed at Gillard if Labor goes for a carbon price. It is more proof that Labor faces an ugly spiral of price pressures from interest rates to electricity bills that will give Abbott another lethal campaign.

Gillard needs to rule out what she won't do and become the reformist champion of what she will do. Being trapped in weak and unconvincing tactical compromises will expose her on the political killing ground.