POLITICAL CONDITIONS
Three political parties dominate the center of the Australian political spectrum. The Liberal Party (LP), nominally representing urban business interests, and the Nationals, nominally representing rural interests, are the more conservative parties. The Australian Labor Party (ALP) nominally represents the trade unions and left-of-center groups. The ALP, founded by labor unions, traditionally had been moderately socialist in its policies and approaches to social issues. Today, it is a best described as a social democratic party. All political groups are tied by tradition to domestic welfare policies offering extensive social welfare programs. Over the last decade, Australia's social welfare system has increased assistance to families while imposing obligations on those receiving unemployment benefits and disability pensions. There is strong bipartisan sentiment on many international issues, including Australia's commitment to its alliance with the United States.

The ALP, under the leadership of Kevin Rudd, defeated the Liberal/National coalition, led by former Prime Minister John Howard, in an election on November 24, 2007. The ALP now holds 84 seats in the House of Representatives, against 64 for the Liberal/National coalition, and 2 independents. Currently, in the Senate, the coalition holds a majority with 39 seats in the 76-seat chamber, but with the election--which was also for half the upper house--a new Senate will be seated in July 2008 in which no party will have a majority. The composition of the Senate is likely to be 37 seats for the coalition, 32 for the ALP, five seats for the Green Party, one for the Family First Party, and one independent.

Rudd and the ALP won the election with a message promising new leadership after 11 years of the Howard government. They campaigned on a conservative platform that mimicked coalition polices in key policy areas such as tax cuts and economic management, while differentiating themselves on unpopular Howard government policies on workplace relations reform and climate change. The Rudd government has ratified the Kyoto Protocol and will work with the international community on combating climate change. It will also seek to undo some of the labor market reforms instituted by the Howard government after the 2004 election. The reforms, which eliminated some worker protections in the name of labor-market flexibility, were never accepted by many working families in Australia, and they deserted Howard in the election. The new Australian government's foreign policy is likely to show strong continuity with that of its predecessors, stressing relations with four key countries: the United States, Japan, China, and Indonesia. The Rudd government strongly supports U.S. engagement in the Asia-Pacific region and has pledged to maintain Australian troops in Afghanistan. It will withdraw Australia's combat troops from Iraq in 2008, however, leaving air, naval, and training assets in and around Iraq.

ECONOMY
Australia's advanced market economy is dominated by its services sector (72% of GDP), yet it is the agricultural and mining sectors (8% of GDP combined) that account for the bulk (52%) of Australia's exports. Australia's comparative advantage in the export of primary products is a reflection of the natural wealth of the Australian continent and its small domestic market; 21 million people occupy a continent the size of the contiguous United States. The relative size of the manufacturing sector has been declining for several decades, but has now steadied at around 10% of GDP. Australia currently enjoys a record-high terms-of-trade (TOT) that is 30% above its long-run average, reflecting the rise in global commodity prices created by booming demand in China and the drop in prices for imports for manufactured goods, mainly from China.

Since the 1980s, Australia has undertaken significant structural reform of its economy and has transformed itself from an inward-looking, highly protected and regulated marketplace to an open, internationally competitive, export-oriented economy. Key economic reforms included unilaterally reducing high tariffs and other protective barriers to free trade, floating the Australian dollar, deregulating the financial services sector, including liberalizing access for foreign banks, increasing flexibility in the labor market, reducing duplication and increasing efficiency between the federal and state branches of government, privatizing many government-owned monopolies, and reforming the taxation system, including introducing a broad-based Goods and Services Tax (GST) and large reductions in income tax rates.

Australia is now in its 17th year of uninterrupted economic expansion and enjoys a higher standard of living than any G7 country other than the United States. Australia's economic standing in the world is a result of a commitment to best-practice macroeconomic policy settings including the delegation of the conduct of monetary policy to the independent Reserve Bank of Australia, and a broad acceptance of prudent fiscal policy where the government aims for fiscal balance over the economic cycle. The Australian Government has zero net debt and, through the "Future Fund," is building a net asset position to deal with future liabilities resulting from an aging population. The Australian economy is expected to grow at around 3.5% in 2007.

Two issues, national infrastructure and climate change, currently dominate thinking about economic policy in Australia. The Australian economy is booming and is operating at close to capacity with unemployment near a 32-year low of 4.3%. Both the federal and state governments have recognized the need to invest heavily in water, transport, ports, telecommunications, and education infrastructure to expand Australia's supply capacity. Australia may be coming out of the severe drought conditions it has experienced over the last 5 years, and received above-average rainfall in many areas during the last half 2007. This should somewhat reduce the intense economic and political pressure on governments to build dams, water-recycling facilities, and desalination plants in drought-affected cities such as Brisbane, Canberra, and Perth.

The second significant issue is climate change. A report commissioned by then-Prime Minister John Howard recommended a domestic carbon emissions trading scheme. It also recommended that Australia take an active role in developing a future global carbon emissions trading system. Under new Prime Minister Kevin Rudd, Australia is committed to adopting a domestic carbon trading system by 2010.

The Australia-U.S. Free Trade Agreement (AUSFTA) entered into force on January 1, 2005. The AUSFTA marks the first FTA the U.S. has concluded with a developed economy since the U.S.-Canada FTA in 1988. Australia has also completed FTAs with Singapore and Thailand and is pursuing other FTAs, including with China and Japan. A burgeoning trade relationship marked by ongoing, multi-billion dollar resource export contracts and rising manufactured imports has driven FTA negotiations with China. Parallel efforts are underway with Malaysia and the Association of Southeast Asian Nations (ASEAN). The new Rudd government has restated its commitment to achieving high-quality FTAs with economies in the Asia-Pacific.

FOREIGN RELATIONS
Australia has been active participant in international affairs since World War I and since then has fought beside the United States and other Allies in every significant conflict to the present day. In 1944, it concluded an agreement with New Zealand dealing with the security, welfare, and advancement of the people of the independent territories of the Pacific (the ANZAC pact). After the war, Australia played a role in the Far Eastern Commission in Japan and supported Indonesian independence during that country's revolt against the Dutch (1945-49). Australia was one of the founders of both the United Nations and the South Pacific Commission (1947), and in 1950, it proposed the Colombo Plan to assist developing countries in Asia. In addition to contributing to UN forces in Korea--it was the first country to announce it would do so after the United States--Australia sent troops to assist in putting down the communist revolt in Malaya in 1948-60 and later to combat the Indonesian-supported invasion of Sarawak in 1963-65. The U.S., Australia and New Zealand signed the ANZUS Treaty in 1951, which remains Australia's only formal security treaty alliance. Australia also sent troops to assist South Vietnamese and U.S. forces in Vietnam and joined coalition forces in the Persian Gulf conflict in 1991, in Afghanistan in 2002, and in Iraq in 2003.

Australia has been active in the Australia-New Zealand-U.K. agreement and the Five-Power Defense Arrangements--successive arrangements with Britain and New Zealand to ensure the security of Singapore and Malaysia.

One of the drafters of the UN Charter, Australia has given firm support to the United Nations and its specialized agencies. It was a member of the Security Council in 1986-87, a member of the Economic and Social Council for 1986-89, and a member of the UN Human Rights Commission for 1994-96 and 2003-2005. Australia takes a prominent part in many other UN activities, including peacekeeping, nonproliferation and disarmament negotiations, and narcotics control. Australia also is active in meetings of the Commonwealth Regional Heads of Government and the Pacific Islands Forum, and has been a leader in the Cairns Group--countries pressing for agricultural trade reform in World Trade Organization (WTO) negotiations--and in founding the APEC forum. In 2002, Australia joined the International Criminal Court.

Australia has devoted particular attention to relations between developed and developing nations, with emphasis on the ten countries of the Association of Southeast Asian Nations (ASEAN) and the island states of the South Pacific. Australia is an active participant in the ASEAN Regional Forum (ARF), which promotes regional cooperation on security issues, and has been a member of the East Asia Summit since its inauguration in 2005. In September 1999, acting under a UN Security Council mandate, Australia led an international coalition to restore order in East Timor upon Indonesia's withdrawal from that territory. In 2006, Australia participated in an international peacekeeping operation in Timor-Leste (formerly East Timor). Australia led a regional mission to restore law and order in Solomon Islands in 2003 and again in 2006.

In 2006, the government committed to doubling Australia's official development assistance to $4 billion a year by 2010. Australia budgeted $2.48 billion ($A2.95 billion) as official development assistance in FY 2006-2007, and has budgeted $2.66 billion ($A3.16 billion) in 2007-2008. The Australian aid program is currently concentrated in Southeast Asia (Papua New Guinea--PNG--is the largest-single recipient) and the Pacific Islands. In 2004, Australia commenced a 5-year $0.8 billion ($A1.1 billion) Enhanced Cooperation Program (ECP), which involved government officials working alongside their PNG counterparts. The future of the program was called into question in 2005, however, when ECP immunity provisions for Australian officials were successfully challenged in the PNG high court. Selected aid flows are allocated to Africa, South Asia, and reconstruction in Afghanistan and Iraq. Contributions to multilateral organizations and other expenses account for about one-third of the foreign assistance budget.