Labor is well ahead in the opinion polls, and even the punters have finally shortened the odds on a Labor win.

John Howard keeps repeating that the Federal Election later this year will be hard to win, and this time he’s sincere. You can be sure he will pull out every stop, be very active and make many new announcements.

Today we were told of his new “war cabinet’s” first initiative, using his newly promoted water supremo, Malcolm Turnbull, is to “grab” control of the Murray Basin – concrete evidence of an urgent and sensible action.

Howard starts the year with two bits of good news. It has rained, and many experts are saying the signs are good for further, drought breaking, rain. Recall that Bob Hawke broke the drought after he was elected, Howard may do it ahead of the election.

Then there is inflation, slightly negative in the December Quarter, with “underlying” inflation also below expectations and below September’s worrying numbers. If this welcome trend continues there will be no further rate hike, and this would remove a threat that might well have given Labor a real chance to win.

This result, incidentally, owes something – perhaps quite a bit – to the Government’s controversial IR policy reform. Joe Hockey will sell this policy better, and a freekick will come when a respected economic guru gives credit where it is due.

Conversely, if Labor is too zealous about “rollback” in this area, it will lose votes.

According to a recent Morgan Poll, 81% of Australian workers say their job is safe and 63% say they could find a new job quickly if they were to become unemployed – both virtually unchanged from a year ago. So much for increased levels of Workchoices-born job insecurity.

In the US, John Howard’s mate George Bush is in real trouble, with his strategy in the War on Terror under serious scrutiny. So far, Howard has been immune to the massive backlash against Bush (and Tony Blair in the UK) and if the “coalition of the willing” is on the way out of Iraq by the time of the Federal Election here, this will be a plus for our Government.

Howard must cut a quick deal with Washington that will see David Hicks home before long. This would be popular.

There needs to be a tough budget. This would minimise the chance of further interest rate hikes and be portrayed as a sign of the Government’s continued economic focus and expertise. The overall economy will continued to be supported by the commodity boom and perhaps also the breaking of the drought. Consumer Confidence has remained robust and Australians are still world champion consumers.

Watch this space!

Read more reading at Henry Thornton.