Pacific Money

Julia Gillard Rolls the Dice

Can Gillard win re-election with an economy that faces an uncertain future?

U.S. President Barack Obama won re-election despite a poor economy. Can his center-left counterpart from Down Under, Australian Prime Minister Julia Gillard, do likewise this year despite the business cycle turning against her?

Launching the nation’s longest ever election campaign with a poll date of September 14th, the Labor leader sought to clear the air and put the focus back on policy.

"The benefit of fixing the date now is not just the end of speculation about election timing. It gives shape and order to year," Gillard said, urging the rival parties to “lay out their fully-detailed costed plans for the timely consideration of voters”.

Political gamble backfires

Trailing the conservative Liberal-National Coalition in the polls, Gillard’s gamble almost immediately backfired.

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Just a day after her announcement, former Labor lawmaker Craig Thomson was arrested over alleged misuse of his former trade union’s funds for prostitutes, air travel and entertainment.

Along with the uproar over the departure of former parliamentary Speaker Peter Slipper, the Thomson scandal gave the Opposition more ammunition in its attacks on the prime minister’s credibility.

If the campaign started badly, it quickly got worse when two senior cabinet ministers announced their resignations two days later, adding to the uncertainty surrounding the minority Labor government.

Polls show Opposition Leader Tony Abbott would win office comfortably if an election were held today, with Labor forecasted to lose up to 18 seats in the national Parliament.

Economy faltering?

“It’s the economy, stupid” might have been Bill Clinton’s famous line, but in Australia the Coalition has made the most ground from its economic credentials and not its leftish opponent.

Despite likely undergoing its 22nd straight year of economic expansion in 2013, Australia’s faltering housing market and mining industry downturn have raised the prospect of weaker growth ahead.

On Friday, the Reserve Bank of Australia (RBA) added to Gillard’s political gloom by downgrading its forecast for economic growth to 2.5 percent in 2013, a full percentage point lower than the previous year.

Despite the much talked about switching from growth in mining to other sectors such as construction, the central bank was less confident about the outlook.

“While the underlying drivers of investment are supportive of growth, the absence of any clear indications of a pick-up in non-mining investment means that the outlook remains quite uncertain,” the RBA noted.

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The bank said unemployment would “drift gradually higher” while business investment would cool, with the economy set to grow below the long-run average of around 3 percent until the end of 2014.

After abandoning its previous pledge of a budget surplus, the government’s fiscal problems have also increased with its admission of a shortfall in revenues from the new tax on mining profits.

Forecast to generate $2 billion this fiscal year, the minerals resource rent tax (MRRT) only collected $126 million in its first six months of operation. The politically costly tax was watered down after its original version cost former Prime Minister Kevin Rudd his job.

Campaign rate hike?

The RBA’s bearishness came despite it leaving interest rate settings unchanged at its first monetary policy meeting of the year on Tuesday.

Holding the official cash rate at 3 percent, Governor Glenn Stevens said the previous “substantial easing of policy” in 2012 had made another decrease unnecessary, with global downside risks said to have abated.

Yet former RBA board member Warwick McKibbin warned that the central bank might rock the government’s re-election prospects with a rate hike before the poll, should global economic conditions continue to improve.

“We’ve been adjusting monetary policy in Australia…partly in anticipation of a bad outcome in the world,” McKibbin told the Australian Financial Review.

“Now if that outcome hasn’t occurred, then you really have to get back up to where you should have been, which is closer to 4 percent than 3 percent.”

The RBA’s decision to increase rates weeks ahead of the 2007 election was considered to have help cost longstanding leader John Howard the election, catapulting his Labor opponent Rudd into the Lodge.

“You would never have predicted a rate increase during the 2007 election,” McKibbin said. “I think they will do the right thing if they have to [in 2013].”

Ironically, media commentators have speculated that Labor could call on its former leader to replace the woman who betrayed him, should the poor polls continue. With the economy softening and the RBA potentially helping the Opposition, will history repeat itself at the ultimate cost to the nation’s first elected female leader?