Business in a holding pattern amid uncertainties

BUSINESS in this country is facing the worst possible conflation of events at the moment.

The two-speed economy risks Dutch Disease setting in for the long term: a situation where our dollar remains high because of our national resources boom, thereby damaging other sectors in the economy that rely on a cheap dollar, industries such as manufacturing and tourism.

Kevin Rudd's super-profits tax on the mining industry was said to be a solution to this situation -- tax the miners and use the wealth to prop up ailing industries. But for a variety of reasons, the backlash to that tax saw it re-written into a very different profits tax that has questionable revenue streams and does little or nothing to help with the two-speed economy.

Then there is the political fallout from the mining tax backflip. It showed that this government doesn't have the stomach for a fight, at least not one that heats up. So in the midst of the current carbon tax debate, that proven weakness gives Labor's opponents strength and belief that they can scuttle the tax before it is legislated later in the year.

The consequence: business uncertainty and uncertainty generated by opposition alarmism.

And it's not as if the carbon tax is being bedded down in a conducive international climate of economic certainty either. Greece's economy continues to teeter on the brink of collapse and the contagion out of Europe now looks like spreading to larger economies like that of Italy, weighed down by debt amounting to no less than 120 percent of its GDP. As Europe's third-largest economy, problems in Italy have far more chance of spilling over into global contagion than do problems in Greece.

Westpac has come out and predicted a decline in domestic interest rates in the coming 12 months. That would be welcome news to home owners weighed down by debt, but only if they don't lose their jobs. The prediction on interest rates is accompanied by a prediction that the unemployment rate will rise, right at a time Labor is trying to convince the voting public that its carbon tax won't threaten jobs.

So the global economy is struggling, Australia has structural problems alongside reform, which is half-baked and uncertain of being legislated, and the opposition is committed to rolling back adjustments to pricing carbon and taxing mining profits if elected (but it is committed to its own half-baked scheme to cut emissions, costing the taxpayer billions of dollars for little or no gain).

Is it any wonder business is entering a holding pattern while it waits for political events to settle down in the coming years?

The political crisis (perceived or otherwise) in this country at the federal level is a perfect illustration of why a minority government should focus on bedding down the running of government, not embark on bold reform.

Labor misread the results of the last election, concluding that policy timidity cost it votes and it needed to go back to the agenda it laid out at the beginning of its first term.

But that ignored the loss of confidence by voters and business in the government's ability to manage things. When such uncertainty abounds, a government is unlikely to take the public with it as it embarks upon any major reforms. Successful minority governments at the state level built future parliamentary majorities off the back of cautious administration. Bob Carr in NSW, Steve Bracks in Victoria and Mike Rann in South Australia all won power by the most slender of margins. They subsequently went about proving that they could be trusted to run the show, winning thumping majorities thereafter.

Apart from the appearance of chaos large-scale reform creates while it is happening, the possibility that it all gets unwound if the complexion of the government changes only adds to a climate of uncertainty during a period of minority rule. That is where we are now. And given how difficult rolling back policies already legislated can be, the uncertainty won't end even if Labor is tossed out of power at the next election.

But there is only two years left to go until the election. Oh joy!