Australia: Business Is Sweating As The Labor Party Rallies

Prime Minister John Howard of Australia may have been pushing his luck. First, he took a big gamble by calling an early general election for Oct. 3--six months before he had to. He then upped the ante by making a new 10% goods-and-services tax (GST) the centerpiece of his "stronger Australia" campaign. Even so, Australia's bookies initially made him an odds-on favorite to defy political gravity and win.

But now, in the closing weeks of the campaign, Howard's opponents in the Australian Labor Party are rallying--after a lackluster start. Major polls have given Labor its best results since March, putting it between one and six percentage points ahead of Howard's Liberal Party-led coalition. Labor leader Kim Beazley has attacked Howard for being devoid of ideas for tackling Australia's economic woes, which are multiplying: slowing growth, contracting exports to Asia, dwindling business investment, and expectations of rising unemployment. "His vision [has only] one element, and that's a goods-and-services tax," says Beazley.

FEEL GOOD. The focus on tax policy has driven other issues into the background. For example, the movement to dump the British monarch as Australia's head of state, making the country a republic, doesn't feature in the campaign. Nor does Australia's economic role in Asia. And while the two leading parties clash, the populist One Nation Party is raising the hackles of neighbors by proposing strict controls on immigration--mainly from Asia--and by pushing for protectionist trade policies and big tax cuts.

Howard hopes he can regain the high ground. He timed the election to coincide with a peak in the nation's feel-good mood. Aussie athletes won a record 198 medals at the recent Commonwealth Games in Malaysia. And the final play-offs of both the rugby league and Australian-rules football championships will fall around election time. Meanwhile, Howard is sweetening his GST plan with $7.7 billion in income-tax cuts.

While his prescription generally pleases business, some executives worry that the promised tax cuts will be a burden on the budget. They also fret that Howard's achievements in cutting outlays will be frittered away for reasons of political expediency. "Now is not the time to lose the urge for reform," says Donald R. Argus, CEO of National Australia Bank Ltd.

So far, Howard has had an almost free ride with his reforms. Labor still bears the scars of its massive defeat in 1996. And until recently, that has crimped its opposition to his policies. But the tax issue is getting Labor leaders back in the game.

The odds favor them. In the past 20 years, three attempts to introduce a tax on consumption have failed. Polls show that voters remain wary of Howard's proposal, although they accept a need for tax reform. Labor's tactic is to rejigger the existing wholesale sales tax and offer tax cuts about half the size of the government package.

A close election without a clear victor could propel Australia into the nightmare of having One Nation hold the balance of power--through its handful of seats. That could weaken the Australian dollar further and intensify the economic downdraft from Asia. "Any radical view, be it right- or left-wing, is seen as a risk by the markets," says Christopher Furness, senior market strategist at London consultancy 4CAST.

The traditional parties have tried to ignore One Nation and its leader, Pauline Hanson. The tactic failed in Queensland, the party's main regional base. And it is allowing Hanson to frame some big national issues. It's as if mainstream politicians are so overwhelmed by problems that they've given up on their biggest challenge--defining Australia's identity and its place in the world in the 21st century.

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