Prime Minister's crisis of authority

FEDERAL Labor appears weak, unconvincing and hostage to its many dilemmas.

THE Gillard government, deft at tactics, is losing its policy authority in the nation and facing a relentless haemorrhage in political support with repeated exposures of its inability to shape events or outcomes.

Labor is in serious difficulty, a fact more apparent the greater the distance from Canberra. The government looks out of its depth, weak and devoid of strategic purpose. So overwhelming are these early signs they demand an urgent rethink of Labor's policy and messages.

In June Julia Gillard explained Kevin Rudd's removal by saying the government had "lost its way", but Labor's risk is that of changing jockeys but failing to get back on track. If this perception takes hold, the government will be finished.

This week the Commonwealth Bank dismissed Wayne Swan with abject contempt in its near doubling of the Reserve Bank's official interest rate rise. Gillard returned to Australia after her bizarre Asian visit that disastrously enshrined the highly dubious East Timor processing centre as the centrepiece of our regional diplomacy. President Barack Obama, in response to the mid-term election defeat, announced he would not proceed with "cap and trade" legislation, but would look for "other means" to confront climate change, thereby undermining Gillard's push to price carbon.

And Reserve Bank governor Glenn Stevens warned that inflation remained the threat with Australia "now subject to a large expansionary shock" from the highest terms of trade for 60 years, a situation loaded with economic time bombs for the Treasurer and the Prime Minister.

The factor that unites such Labor tribulations is the party's inability to formulate effective policy. The public, having refused to re-elect Labor in its own right, is having its doubts affirmed. Labor has spent far too long in indulgent self-congratulation at its spending stimulus that helped to quarantine Australia from the global crisis. It was looking backward, not forwards. It failed to anticipate the new dynamics - economic, financial and political - flowing from the global crisis.

These are now on full display: an epoch-defining resources boom that imposes serious capacity constraints, interest rate pressures and new infrastructure needs. Labor's policy response is weak, from its misconceived super resources tax to its hostility towards supply side reforms.

Its failure is symbolised in the complete political alienation of Western Australia, now the centre of one of the greatest resource developments in world economic history. The Liberal Premier in WA, Colin Barnett, with partial support from Labor Opposition Leader Eric Ripper, opposes the new mining tax, the surrender of one-third of the state's GST revenue and the Commonwealth Grants Commission's redistribution among states. Federal Labor has mismanaged each of these issues.

However, the central charge against Gillard Labor is more serious: that it is mismanaging one of the epic booms in Australia's history with an outdated policy framework devised during 2005 to 2008 that misreads the boom's scale and the Treasury and Finance Red Books after the 2010 poll calling for substantial policy revision. Only a fool could miss the Reserve Bank's Cup Day message: it will keep hiking interest rates to contain prices from this once-in-a-century boom and this will hurt much of the rest of the economy. Gillard Labor seems clueless about how to respond.

As for the Commonwealth Bank, it has called Swan's bluff. Its 45 basis point interest rate lift proved his jawboning is useless. At one stroke the Commonwealth Bank has defied Swan and thumbed its nose at Treasury and Reserve Bank analysis that bank funding costs do not justify such action.

Swan attacked the bank for a "cynical cash grab" and promised a "new wave of reforms" in banking next month. Gillard stamped her foot and declared she was angry. Opposition treasury spokesman Joe Hockey, seeking vindication, branded Swan a "running joke" and announced a new bill to give the Australian Competition and Consumer Commission power to investigate price signalling and anti-competitive behaviour.

Yet the collapse of competition in the financial sector was a consequence of the global crisis. It has been conspicuous for some time. Yes, there is no overnight solution. But Hockey is right to call for a new financial system inquiry. This follows a similar call last year from Ian Harper, a member of the Wallis inquiry. Stevens has given Labor the brief by saying post-crisis the finance industry internationally needs to be "less exciting, less ambitious for growth, less complex, more conspicuous of risk and more responsible about where those risks end up". But Labor declines any such inquiry.

Meanwhile, the higher dollar from the boom is weakening government revenues and demanding answers on two policy fronts: will Swan tighten fiscal policy, and will he embark this term on more ambitious corporate and personal tax reform based on the Henry review? The Coalition wants action on both fronts. If Gillard Labor stays static this accentuates its central problem: looking weak, unconvincing and hostage to events.

This week's US election has delivered another arrow deep into Labor's political heart with Obama, in words sure to wound, abandoning any emissions trading scheme for many years. Read his words because they will cut into Australia's political debate. "Cap and trade was just one way of skinning the political cat," he said. "It was not the only way. It was a means, not an end. And I'm going to be looking at other means to address this problem."

Shadow climate minister Greg Hunt said: "The President has announced that cap-and-trade is now dead, buried and cremated in the US. If she [Gillard] won't listen to Coalition plans for direct action, perhaps she might listen to the US. President Obama will now examine direct action models, just as has been put forward by the Coalition here in Australia."

Yet Gillard has pledged to a carbon price as proof of her economic reform credentials. That means an Australian price without any US congress-approved price. It is almost certainly an impossible call. Tony Abbott will renew his campaign with fresh and simple ammunition: "If Obama says no, than Australia should say no." Understand the magnitude of Gillard's dilemma: she must press ahead or fall away.

Pressing ahead will accentuate the lift in electricity prices and falling away will confirm Labor as a party in a systemic crisis over belief and commitment. The risk, again, is that the Greens and Abbott will look strong while Labor twists in the wind as its support declines.

Could there be any worse situation? Yes. It lies in the explosive outlook building in this country over boatpeople. This protracted crisis is far advanced without any sign of policy resolution. The Canberra-induced trap is to think this issue is settling down. That misses the mood on the ground and the shift in policy.

Immigration Minister Chris Bowen said last month the refugee approval rate for claims from Afghans is at 50 per cent, down from well above 90 per cent. That is, on Australia's own assessment, only one in two Afghans arriving is a refugee. The others, pending appeals, have no right to be here. "I think that's an important message," Bowen said in a classic understatement. It penetrates to the central issue: that Australia's approval rates have been too generous, that the restrictive language of the 1951 Refugee Convention needs to be upheld and that Australia must deny asylum-seeker arrivals any migration self-selection outcome.

The progressive mantra is about to unravel. This is because the flow of boats is increasing, fewer boatpeople are refugees, it is extremely hard to deport non-refugees, new detention centres are having to be established on the mainland and numbers are such - totalling 5800 this year - that with family reunion included boat arrivals now affect Australia's overall population intake profile.

Far from Canberra, community meetings at Northam in WA and Inverbrackie in South Australia, showed on-the-ground alarm about new detention facilities.

Abbott led the Coalition team. He punished Labor, saying people were "understandably outraged" when governments lost control of the borders.

Bowen says Labor has a plan to stop the boats. It is the regional framework including the proposed East Timor processing centre that Gillard pushed this week in Indonesia and Malaysia. Neither country is persuaded. Both will keep talking.

As a new Prime Minister, Gillard has tied her prestige in the region to this initiative. It will end in Gillard's humiliation or in a regional solution of improbable benefit to checking the boats to this country. The reality is Gillard cannot tolerate the status quo on the boats. Ongoing arrivals reveal Labor's failure to deliver border security, a legitimate expectation of the Australian public since nationhood.

Labor always looks better when the parliament sits. Its tactical skills expose Coalition flaws and divisions and the media duly follows. But such tactics are not enough to save Gillard Labor.

Arising from the resources boom, the finance sector, federal-state relations, climate change and boat arrivals, it is besieged by policy challenges that demand far-reaching and convincing responses that, so far, seem beyond Labor's political character.