Global crisis poses problems for Australia's Rudd

By James Grubel - Analysis

CANBERRA (Reuters) - Australian Prime Minister Kevin Rudd marks one year in power on Monday with his voter approval riding high, but the global financial crisis is threatening to derail his reform plans and puncture his popularity.

Rudd led the left-leaning Labor Party to power on November 24, 2007, pledging to rein in government spending, fight climate change, bring troops home from Iraq and apologize to Aborigines for past injustices.

But one year into a three-year term, analysts said the global economic downturn would force Rudd to curb his future ambitions, particularly on climate change, to make sure he holds onto public support against a backdrop of rising unemployment.

"Out in electorates where people actually work, they are very nervous," political analyst Nick Economou said, adding voters would be angry if plans to introduce carbon trading, to fight climate change, added to their problems.

"If he puts in place something that will exacerbate the problems coming from the financial crisis, he'll lose the next election," said Economou, from Melbourne's Monash University.

The faltering Australian economy and rising unemployment could also help revive support for the conservative Liberal Party, which warned voters at last year's elections that Rudd could not be trusted to manage the economy.

Labor inherited an economy in good health from its rival.

Rudd, too, got off to a good start, overseeing a 16th consecutive year of growth.

SLOWING GROWTH, RISING UNEMPLOYMENT

But the global financial crisis has hit Australia hard.

The government is forecasting slower growth and rising unemployment, and is spending A$10.4 billion ($6.6 billion) on a stimulus package to ensure the economy keeps growing.

The crisis has forced the government to cut A$40 billion from forecast tax revenue over the next four years, due to weaker corporate profits, leaving a surplus of only A$5.4 billion for 2008-09, down from its May forecast of a record A$21.7 billion.

Commodity prices and booming Chinese demand for Australian resources have also eased, while Japan, Australia's second-largest export market and a major customer for coal and iron ore, has slipped into recession.

In response, the government has forecast growth to slow from 2.75 percent to 2 percent in 2008-09, with unemployment rising off 30-year lows under 4 percent earlier in the year to 5.75 percent by mid 2010, although some economists believe the forecasts are optimistic.

Rudd has promised more stimulus, if needed, to keep the economy growing, leaving little money for other reforms in education and health.