CANBERRA, Aug 15 (Reuters) - Australia has recently b
rought in a highly divisive new carbon tax and is only months away from the introduction of pioneering new anti-smoking laws, after the highest court threw out a legal challenge by tobacco firms.
On July 1, Australia imposed a price on carbon emissions across its $1.4 trillion economy, a bitterly contested law that may cost the prime minister her job.
Australia's biggest polluters, from coal-fired power stations to smelters, will initially pay A$23 ($23) per tonne of carbon dioxide emitted, more than twice the cost of carbon pollution in the European Union.
Prime Minister Julia Gillard's government says the plan is needed to fight climate change. Australia has amongst the world's highest per capita carbon dioxide emissions due to its reliance on coal-fired power stations.
Even at its beginning, the scheme's future is in doubt. The conservative opposition, which says the tax will cost jobs and damage the economy, has vowed to repeal it if they win power in elections due by late next year.
Gillard holds a narrow one-seat majority in parliament, relying on the Greens and two independents to stay in power, and could lose office or be forced into an early vote if the government loses a seat in an unexpected by-election.
RATINGS (Unchanged unless stated)
Following are the key political risks to watch:
At the start of August, Australia's central bank kept its main cash rate steady at 3.5 percent, for a second month running as expected, saying it was too early to judge the impact of previous cuts.
Unemployment remains low at 5.2 percent, around half the rate in the euro zone.
Australia's government handed down its promised surplus budget in May, scrapping planned tax breaks but offering more cash to its traditional supporters to deflect attention from scandals that threaten Gillard's grip on power.
The budget plans to deliver a small A$1.5 billion ($1.53 billion) surplus in the year to June 30, 2013, thanks largely to cuts in defence spending and foreign aid, and abandoning planned tax cuts for companies and savers.
In its budget, Gillard's deeply unpopular government sought to appease its Labor Party heartland by announcing a raft of new cash payments to the low-paid and those on welfare.
Economists have questioned whether a surplus was needed when Australia's central bank had just cut interest rates, but Treasurer Wayne Swan said the fiscal tightening would protect Australia against global turbulence and preserve its AAA credit rating. It is one of just 14 countries with the top credit ratings from all three leading agencies.
In a major change to immigration policy, the government said in May it would start allowing mining firms to use foreign workers to help address labour shortages, which the resources sector says are hampering its expansion.
What to watch:
- The world economy poses a downside risk not only to Australia's economic performance, but also to the government. Failure to deliver the promised surplus in a country wary of government borrowing could imprint Labor in voters' minds as economically incompetent.
- A fall in commodity prices would also hit Australia's terms of trade, and put the government under more spending pressure.
- Further job cuts, particularly from manufacturers and car makers, could undermine the government's ability to sell itself as a good economic manager.
Gillard affirmed her leadership by winning a February contest against challenger Kevin Rudd, but she has continued to struggle in the polls and to convince voters about the benefits of the carbon tax. Polls show support for her government stuck near record lows around 28 percent.
In April, she suspended from the party lawmaker Craig Thomson, who is accused of misusing funds, the move coming just a week after the Speaker of parliament stood down over a sexual harassment lawsuit. Thomson's suspension has not further weakened Gillard's hold on power, as he has supported the government as an independent.
Analysts remain divided on whether Gillard can achieve the political stability needed to be re-elected, and believe the Labor Party could still replace her before the next election if the polls do not improve.
Opposition leader Tony Abbott is well ahead in opinion polls, and he has promised to scrap the carbon tax and a 30 percent mining profits tax if he wins office.
What to watch:
- Political mistakes by Gillard that could prompt her supporters to look for a new leader.
- An especially violent reaction to the carbon tax from voters or businesses, though the government has delivered billions in compensation and free permits to industry to cushion the initial blow of the carbon price.
- The carbon tax will move to a floating price in mid-2015. It is the central plan of the government's policy to fight global warming by curbing carbon emissions by 5 percent of year 2000 levels by 2020.
Australia is planning to introduce tough new packaging regulations for tobacco, which will force producers to abandon branding and sell their cigarettes in uniformly drab packets with no adornments.
In August, Australia's highest court endorsed those laws, throwing out a legal challenge from cigarette companies in a major test case between tobacco giants and anti-smoking campaigners.
Tobacco giants British American Tobacco, Imperial Tobacco, Philip Morris and Japan Tobacco claiming the rules were unconstitutional, an argument the court rejected.
The decision means cigarettes and tobacco products must be sold in plain olive green packets without branding from December 1. The plain packages will also carry graphic health warnings.
The laws are being closely watched by around the world, and may become a test case for anti-smoking nations in the World Trade Organization (WTO).
What to watch:
- How the tobacco industry fights the laws. Ukraine, Honduras and the Dominican Republic have launched challenges in the WTO, though Australia believes big tobacco companies are behind the Ukrainian and Honduran moves.
- There may also be avenues for challenging the rules under trade deals including the proposed new Trans Pacific Partnership.
- Britain, the European Union, New Zealand and Canada are also considering tougher cigarette packaging laws.
Australia in April welcomed the first U.S. marines, who will rotate through northern Australia under the U.S. pivot to Asia, a move which could further strain ties with its biggest trading partner China.
Australia's suggestion in March that it could one day allow U.S. spy flights to operate from a remote Indian Ocean island will also win favour from Washington, but could displease China.
Australia also risks angering China commercially, after Gillard in late March banned Chinese telecoms firm Huawei from tendering for major government contracts, citing undefined security concerns.
What to watch:
- How China responds to Australia's blocking of Huawei, and any further diplomatic or commercial spats.
- Any concerns about the strong U.S. military ties could see Australia caught in a row between its strongest ally and its biggest trading partner.
(Editing by Daniel Magnowski) Keywords: AUSTRALIA RISKS/
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