Beleaguered Labor caught in a perfect storm

Julia Gillard

THE 2011 year inaugurated what is best called the New Australian Stress -- the nation is tied to Asia's growth cycle, susceptible to the economic crisis in the rich world, yet trapped in a domestic political mire that threatens to drown Gillard Labor.

To visitors Australia presents an incomprehensible paradox. The nation that survives the rich world financial crisis better than almost anybody has a Labor government burdened by flawed leadership, division and the worst ratings since polling began.

The disillusionment in Australia seems trivial compared with the problems of Europe and America. It is, however, meaningful in its own right. It testifies to alienation within the political system, equivocation about Australia's future path and the doubt over whether such a weakened government can deliver the reforms the nation needs.

Amid the tumult and contradictions the decisive question is rarely put: is this damaged Labor government capable of addressing the competitiveness and productivity hole into which Australia is sinking?

Beneath our prosperity and complacency, huge problems are accumulating for Australia. Their solution means that Australia, above all, must stand free of the crisis of Western democracy and government weakness in its European and American dimensions. It is poor governance in the eurozone and the US that has undermined the developed world and damaged the lives of citizens.

The eurozone faces a certain recession in 2012. The unknowns are its depth along with the economic and political fallout. While the US picture has brightened in recent months, its economy has yet to recover from the 2008-09 recession. The fear in the Atlantic zone is that the scale of the problems outrank the quality of the leadership. This is the worry that besets Australia.

For Julia Gillard, the year is ending as it began. The shadow over her leadership is lengthening. The effort to invest her government with a better look via a ministry reshuffle has exposed her authority problem and the pervasive threat from Kevin Rudd.

How long will the minority government last? Nobody knows. If Gillard has her way the parliament will run full term. But Gillard, as a realist, would know she cannot survive to the election with a primary vote in the 29-31 per cent zone. That is the death zone. Gillard must lift that vote.

Yet the story of recent weeks is her stalled effort to get momentum. She seems stuck between the entrenched scepticism of the public and her own failures of judgment.

The idea of Rudd's return is astonishing. How would Labor explain it? The perception would be that of a desperate party recycling failed leaders. Any notion of a smooth transition is fanciful. It would be tough and brutal given the depth of feeling across much of the caucus.

Gillard and Wayne Swan are tied together. If they fall, they fall together. Rudd would favour Chris Bowen as his treasurer.

A resurrected Rudd would need to alter the policy framework: that means reviewing the carbon scheme and ties with the Greens. The prospect of Labor staying united would be highly dubious. Rudd would be tempted to an early election figuring his stocks would be highest at his inception. If Rudd became PM it is most unlikely the parliament would run full term.

This year may become ominous in Labor history. It is when Gillard, having formed minority government in 2010, was unable to consolidate and fell away.

Labor's primary vote today is about eight percentage points below its 2010 result, a decline without precedent.

The party faces a new structural problem: fighting the Greens on its Left and the Coalition on its Right, and it has no answer.

Its last resort is to demonise Tony Abbott sufficiently to make him unelectable. But that works only if Labor itself is stable and credible.

Gillard is getting her laws (apart from the migration laws) through the parliament but her main 2011 achievement, the carbon pricing scheme, is unpopular and likely to remain unpopular.

With global action stalled for much of the decade this prompts the question: was Gillard's new passion for pricing carbon driven by Australia's national interest or Labor's political interest in making minority government work?

There is now deep tension between the parliament and the country and Gillard's survival is heavily identified with Tony Windsor, Rob Oakeshott and now Peter Slipper, figures whose choices probably mean they will not appear in the next parliament.

Abbott's central theme is about trust. His message is Labor's betrayal -- of its promises and its people. This notion has taken hold. It is tied into another idea as old as Australian politics, the hip-pocket nerve. Labor seems to have overlooked that Australia is becoming a more high-cost country.

In her speech last month outgoing Australian Industry Group chief Heather Ridout, who joins the Reserve Bank board next year, spelled it out: the higher dollar had changed prices so our exports are more expensive and import- competing businesses are now high-cost; international investors in their capital allocation "are ranking Australia as a high-cost option"; unit labour costs have been growing at a world-leading pace; our comparative advantage of cheap energy is eroding and Australia's locked-in $23 a tonne carbon price was "way out in front of the pack"; our interest rates and company tax are comparatively high. Ridout branded Australia "the Scandinavia of the Asia-Pacific but without Scandinavian productivity levels".

This hits a raw nerve in Australia's psychology.

The draft energy white paper this week identified $240 billion investment required to 2030 to maintain electricity and gas generation and distribution.

Resources Minister Martin Ferguson put the issue on the line: household electricity prices had risen 40 per cent in the past three years and will continue to rise given the investment required.

The point, Ferguson argued, was the imperative for a market-based approach to energy, greater efficiency, privatisation of assets and no pre-determined views about the best clean energy options.

The politics are apparent: if Labor imposes unnecessarily high costs on households it will be penalised by a ballot box revolt.

Ferguson knows that for too long Labor governments chose high-cost options in the cause of being green and assuming that Labor-voting low-income workers were too dumb to realise they were being played for mugs. That game is up.

Given the present global situation Labor struggles with a perplexing policy conundrum: how to protect Australia from the European crisis yet seize the opportunities from what Labor calls the coming Asian century.

Contrary to impressions, the latter task is the most challenging. There is no precedent in our past for this project. Australia is more divorced than ever in its history from the economic fate of Europe and America.

The shallow talk about exploiting the Asian century conceals the magnitude of the economic, political and cultural changes this involves.

Treasury chief Martin Parkinson in a speech this week, A Year in Retrospect, A Decade in Prospect, said Australia's economic growth was still about trend levels even as Europe's sovereign debt crisis intensified. What are his messages for Australia? Parkinson, in effect, says government must do two things: take hard fiscal decisions to keep Australia's public finances strong but simultaneously pursue an economic reform agenda to manage the global shocks and tackle the decline in our productivity performance.

It is a tall order. Revenue between 2008-09 and 2012-13 is down about $141bn on expectations. Achieving surplus means tough decisions as Swan has emphasised. What Parkinson didn't say, of course, is that Australia, free from any crisis of European or US dimensions, risks complacency undermining its will to reform. With a primary vote of 30 per cent and a minority government how much tough decisions can be expected from Labor?

Yet the Asian uplands await. From 2009 to 2020 the middle-class consumers in the Asia-Pacific are likely to rise from 500 million to 1.7 billion. This should be Australia's future. It is the reason Gillard commissioned Ken Henry's report on the Asian century.

Parkinson says the middle classing of Asia "creates a massive potential market" for Australia. This is not just commodities and energy but in education, manufacturing, tourism and agricultural exports for people with a more protein-rich diet.

Being competitive and productive is basic to this challenge. Yet many of the industries nominated for such Asian success are under pressure today from a combination of the high dollar, high costs, weak productivity and unintended policy consequences.

If this is the future, Labor needs to articulate such vision and prosecute the policy required across the board. The partial retreat of the carbon tax issue gave Labor a new policy chance: to exploit the advantage of incumbency, to set the agenda on its own terms and to tell the public what Labor stands for in 2011 and 2012.

The results, so far, are unimpressive. Nobody is any the wiser. Maybe Labor is too battered and bruised. Maybe it is too fixated on survival to devise an effective governing strategy. Maybe it is too focused on internal problems rather than Australia's problems.

But Labor, in forming minority government last year, has conscripted itself to the challenge. It needs to do a lot of hard thinking over summer and return with a better policy strategy and message for the people.

Otherwise, sooner or later, it will slide out of office.