Gillard is becoming a very good Prime Minister.

History doesn’t judge a Prime Minister by the quality of Australia’s education or health systems, their foreign policy achievements or empathy for flood victims but by economic management, including a capacity for tough economic reform.
In other words, economic policy makes or breaks a Prime Minister and everything else is just noise. By this measure, Julia Gillard is on the cusp of becoming a very good Prime Minister.
But she is under-rated, and this is partly her making. After executing Rudd, she could not have started more unimpressively, highlighted by a plethora of dud policies and witless slogans. But just as a slug morphs into a butterfly, Gillard has emerged in 2011 with an impressive economic policy agenda.
The agenda is based not on Gillard’s ideological conviction but her pragmatism. Labor is at its best when it combines a progressive ethos with economic rationalism, which ultimately leads to economic reform beyond which the conservatives are willing to go. Gillard is the first Labor leader since Paul Keating to understand this.
Gillard is defining her leadership through economic policy. It’s why she repeatedly lauds the economic reforms of the Bob Hawke and Paul Keating, such as floating the dollar, liberalising the financial system and cutting tariffs, and has promised to “walk the reform road every day”. It’s also evident in the policy items she has vowed to prosecute in 2011.
The most important is a price on carbon, which is the centrepiece of the government’s response to climate change. The government will seek to introduce a fixed carbon price from July 2012, which will transition to an Emissions Trading Scheme within four years.
Gillard has committed to a market-based solution to climate change. To pay for the Queensland flood reconstruction, for example, the government has also slashed a number of green programs, such as the Green Car Innovation Fund and the Cleaner Car Rebate Scheme (“cash for clunkers”) and has cut support for solar and carbon capture storage projects. These budget savings not only affirm the government’s commitment to carbon pricing but deliberately spurn industry intervention as public policy.
Carbon pricing is an ambitious goal fraught with political danger. Gillard will have to withstand an opposition scare campaign that paints a $300-a-year rise in electricity prices as the biggest threat to Australia since Shane Warne’s retirement. But a good Prime Minister will fight for what they believe in.
Every important economic reform in Australia since 1983 has been dangerous. Hawke and Keating made Australia’s economy internationally competitive over the objections of many both inside and outside their party and the GST almost cost John Howard the 1998 election. Pricing carbon isn’t the safe path for Gillard to take but it’s the right one.
If done right, a price on carbon would be an economic reform comparable to the floating of the dollar in 1983.
Another big agenda item raised by Gillard in 2011 is the need to increase labour force participation. Gillard has flagged an intention to introduce tax and welfare reform to encourage an extra two million Australians into work, many of which are long-term unemployed or on disability support. It’s a fiendish policy area because higher effective marginal tax rates provide a disincentive for people to move from welfare to work.
But Gillard would not have raised this as a big ticket issue unless she is prepared to go deeper than initiatives in training and education, which is the Labor Party’s bread and butter. Therefore, expect this year’s tax summit to focus on the interaction between the tax system and welfare, which is something that both major parties have avoided for years.
In recent months, the Gillard government also vowed to eliminate Australia’s remaining tariffs, which will no longer be used as bargaining chips in politically motivated free trade agreements. It’s pure economic rationalism and boldly antagonises the union movement and Labor’s Left faction.
The missing piece to this year’s economic agenda is tax reform more generally, including any discussion of further cutting the company tax rate, increasing the GST and overhauling inefficient state taxes. Gillard is burdened by a lightweight Treasurer in Wayne Swan and will have to use all her authority to resurrect the Henry tax review.
Gillard has more than justified her midnight coup against Rudd by clearly distinguishing herself on economic policy. Whilst Rudd was disposed to writing anti-capitalist manifestos in culture magazines, Gillard is trying to “reduce the footprint of the government on the economy”. Rudd was also an old fashioned industry interventionist where as Gillard has summarily executed slush funds for the car and solar industries. Rudd was firmly to the left on the economy but Gillard occupies the reforming centre.
At the moment, Gillard is all talk but talk before action isn’t necessarily a bad thing. If Rudd and Swan discussed the mining tax with key stakeholders prior to its announcement, instead of ambushing the industry in the lead up to an election, they may have built a consensus for the tax.
It’s not going to be easy for Gillard to deliver all her economic policy agenda and it’s likely some in her tenaciously left-wing party will try to temper her ambition. But if she can, the conventional wisdom about a struggling Prime Minister and ascendant opposition leader will be turned on its head.
The media will need a new narrative and it may be that Gillard has become a very good Prime Minister and that Tony Abbott is under pressure to rise above his petty anti-tax agenda. Malcolm Turnbull, more than anyone, will be hoping Abbott can’t because he would be the perfect opposition leader to take down a rising Gillard.
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