Julia Gillard is looking more and more like a rabbit trapped in the headlights. She is totally confounded by the need to keep sweet with the independents and the greens, so much so that they have become the focus of her policy attention. As a consequence she is implementing more and more distorting policies, in a situation where the economic agenda militates that she should be removing distortions from the economy. She is also alienating State Governments who she needs in order to implement her major reform packages.

The first of her major new policies was announced today in conjunction with Nicola Roxon and Simon Crean. It was the first round of additional funding for hospitals, which has prioritised the regional hospitals over the city hospitals. This is a sop to the Independents, which seems to have been announced without reference to the States and yet hospital funding was meant to have been a cooperative process involving the State Governments. Moreover there has been no attempt on the part of the Government to determine that the regional hospitals deserve priority over urban hospitals.

At the same time both the Treasury and the IMF have emphasised the need for structural reform to the economy. Gillard seems to be ignoring these requirements in favour of managing the demands of the Independents. Mind you the IMF and the Treasury have different appraisals of the risks to the economy. The Treasury seems to be concerned with the looming capacity constraints brought on by the commodities boom ( a view it shares with the Reserve Bank, which is worried about the possibility of inflationary pressures growing). On the other hand the IMF is concerned about the structural weakness that is implied by a reliance on commodity prices staying high. It is pushing for more fiscal consolidation.

More fiscal consolidation will inevitably mean cutting back on health and education expenditure or cutting middle class welfare. Neither the Government nor the Opposition seems to have much appetite for this, but sooner or later the nettle will have to be grasped.

Barnaby Joyce gave an interesting speech yesterday in which he said that some of the revenue projections for the Budget over the next three years were decidedly ropey. His conclusion was that the Government needed the Carbon Tax to cover the black hole. As it seems the Mining Tax may not yield the amounts forecast, and projections of yields from such things as HECs repayments are overly optimistic, Barnaby could well be right.

However the experts advising the Climate Committee are likely to agree that Carbon Tax revenues should not be appropriated for consolidated revenue but should be hypothecated to meet the requirements for movement to a low carbon economy (as advocated by Marius Kloppers), so simply using this money to prop up the Budget may be difficult. It all augers for a minimalist three years of Government, albeit in a near hysterical political environment.

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