Risk Spotlight: Australia

By Christopher McKee, PRS Group



Rudd turns the tables on Gillard

On June 26, the governing Australian Labor Party (ALP) held a leadership vote in which Prime Minister Julia Gillard was defeated by Kevin Rudd, a former prime minister who lost a similar vote to Gillard three years ago. Rudd was replaced shortly before the 2010 election, at which the ALP fell just short of retaining a majority of seats but managed to remain in power with the backing of independent lawmakers. While it is possible that the more recent reshuffle at the top could spur the ALP to a come-from-behind victory at this year’s election, the more realistic goal of party leaders is to avert what had been shaping up as a potentially catastrophic defeat at the hands of the Coalition, an alliance of the Liberal Party (LP) and the National Party (NP).

The results of a Newspoll survey published in early June showed LP head Tony Abbott opening an eight-point lead over Gillard as the preferred candidate for prime minister, while the Coalition’s lead over the ALP swelled to 16 points (54-38) on a two-party preferred basis. Inside the ALP, members were predicting that Labor might struggle to retain as few as 30 of the 150 seats in the lower house, as even entrenched veterans, including Finance Minister Wayne Swan and Defence Minister Stephen Smith, appeared to in danger of losing their seats.

Polling data has consistently shown Gillard to be less popular than her predecessor, but as recently as the first week of June, Rudd denied that he had any intention of challenging for control of the party. However, his factional allies made no secret of their displeasure with Gillard, and with factional tensions all but precluding a late rally for the ALP, Gillard forced the issue.

In announcing the leadership vote, Gillard pledged to retire from politics if she lost, for the sake of party unity, and called upon any challengers to make a similar pledge. Rudd accepted Gillard’s terms, and won the caucus vote by a margin of 57–45.

Can Rudd save the ALP?

Predictably, the ALP has enjoyed a poll bounce following Rudd’s return to the premiership (he was sworn in on 27 June). Surveys conducted by Galaxy Research and Newspoll both showed the coalition’s lead over the ALP narrowing to just two points (51%–49%), and, perhaps more significant, the Galaxy Research poll also showed Rudd preferred as prime minister over Abbott by 51%–35%.

However, a net loss of just one seat would be enough to cost the ALP its hold on the reins of power, and it is doubtful that Rudd’s return as prime minister will do much to revive flagging support for high-profile Laborites who left the Cabinet upon Gillard’s departure. It is clear that Abbott is not much loved, especially among female voters, but the ALP remains divided internally, a fact that limited Rudd’s options for assembling a new Cabinet, which Abbott has disparaged as Labor’s “C team.”

Moreover, with real GDP growth continuing to run below 3% and the unemployment rate creeping upward, it seems highly unlikely that most voters will decide to stick with the clearly dysfunctional ALP when it comes to the time to actually cast a ballot. Although Rudd’s appeal may be enough to stave off an utter disaster, and could even change the dynamic enough to produce a close election, a Labor victory would rank among the top electoral upsets of all time.

Policy implications

Rudd is under no obligation to adhere to the 14 September election date set by Gillard, and has hinted that he will probably revise the schedule. Taking into account the minimum duration of the campaign, the earliest possible date for an election at this point is late August, but the vote could be held as late as 30 November.

On the one hand, an earlier election would prevent an extended period of uncertainty that could weigh on business sentiment, and would reduce the danger that the positive effect of the recent leadership change on voter perceptions of the ALP might wear off before Rudd seeks a mandate. On the other hand, a delay would give Labor more time to hammer out a winning policy program.

Carbon Tax

The centerpiece of the LP-NP’s policy platform is Abbott’s “pledge in blood” to repeal the controversial carbon tax that went into effect in July 2012. Even assuming Abbott has the numbers to pass the necessary legislation, fulfilling that promise may not be as easy as Abbott has suggested. The government is unlikely to take action until the new Senate convenes in mid-2014. As such, moves to dismantle the new system will not commence until the scheme has already been in place for two years, all but ensuring that the repeal process would be rather disruptive.

Abbott might be able to get away with revising his plan to encompass changes short of repeal after becoming prime minister, but were he to change his tune before the election, the damage to his credibility would create a serious risk of snatching defeat from the jaws of victory. The self-imposed limitation on Abbott’s pre-election room for manoeuvre on the issue has provided Rudd with an opportunity to steal a march on his rival, and he is already taking advantage.

Gillard’s policy team argued that the tax, which under current plans will be replaced by an emissions-trading scheme over time, has already produced a reduction of emissions and that moves to compensate households for the increased costs associated with the tax were similarly effective. In contrast, Rudd has conceded that the existing scheme is flawed, and has floated the possibility of an immediate transition to an emissions-trading model, which would result in a significant increase in the cost to affected businesses. In that regard, it is worth noting that polls of executives indicate that what Rudd is proposing is much preferred by corporate leaders to Abbott’s plan of outright repeal.

Minerals Resource Rent Tax

Abbott has also promised to scrap the Minerals Resource Rent Tax (MRRT), a 30% tax on the “super-profits” of mining operations, which also went into effect in July 2012. Critics contend that the tax is so complex that it will cost both the government and mining companies millions of dollars to verify compliance, while at the same time loaded with loopholes that actual tax payments by the largest operators will be less than compliance costs. Opponents of the tax complain that the structure of the tax favours large, established operations at the expense of the smaller newcomers that are expected to play a leading role in new exploration moving forward.

The case for repeal has been strengthened by a slump in the mining sector that prompted the government to cut its estimate of revenues from the tax for the 12-month period to 30 June, 2013 from AU$2 billion to just $800 million in early May. The mining sector, which accounts for roughly 20% of national output and nearly 10% of jobs nationwide, has been hit hard by a fall in prices for coal and gold that has compounded the negative effect of a strong currency on the export sector. A combination of falling income and rising operating costs is shrinking the profits of the mining companies, which have responded by shedding workers by the thousands.

Rudd is in no position to compete with Abbott on this issue. The MRRT is in many respects just a modified version of the resource super-profits tax (RSPT) proposed by then-Prime Minister Rudd in 2009. The RSPT plan triggered a ferocious backlash from mine operators, whose ads attacking the tax—and Rudd—are generally acknowledged to have contributed to the fall in popularity that left him vulnerable to a leadership challenge in 2010.

Now that Rudd is back at the helm, it is probably safe to assume that the opposition will use every means at its disposal during the upcoming campaign to draw a direct connection between the MRRT and the ALP leader in the public mind, to the benefit of the Coalition. Abbott will face pressure to make good on his promise to repeal the tax, and the political and logistical obstacles will not be nearly as great as in the case of the carbon tax. Given the weak revenue-generating power of the MRRT, an economic argument for retention of the tax is unlikely to be persuasive.

Christopher McKee, PhD, is CEO and Owner of the PRS Group Inc, a US-based, quant-driven, country and political risk rating and forecasting firm in operation since 1979. A former academic and current private equity investor, Chris is the author of several publications dealing with international business and risk, and has lived and worked in a  range of emerging markets, including Latin America, South East Asia and North Africa.

cmckee@prsgroup.com

Recent Posts