Julia Gillard, Australia’s new prime minister, has bowed to the demands of the powerful local mining industry and watered down the controversial resource super profits tax, clearing the way for a general election as early as next month.

After a week of intense talks with mining heavyweights BHP Billiton, Rio Tinto and Xstrata, Ms Gillard on Friday cut a deal to replace the wider mining tax with one that applies only to iron ore and coal.

She also cut the headline tax rate from 40 per cent to 30 per cent – but this translates in effect into a 22.5 per cent rate after a 25 per cent extraction allowance, which means only the resource profit is taxed. A further concession is that the tax will only kick in when profits exceed a 12-13 per cent rate of return rather than 6 per cent.

By ending the conflict with the mining industry, while at the same time securing enough extra tax revenue to pay for new policy initiatives, Ms Gillard has solved the biggest problem bequeathed by Kevin Rudd, her predecessor.

“Our discussions with the Australian government have been very constructive and we’re pleased with the progress that has been made,” Marius Kloppers, BHP Billiton’s chief executive, said in a note to staff. “However, there is still a great deal of work to be done before the tax is enacted.”

Ms Gillard has already reversed federal Labor’s slide in the polls since coming to office last week and put her party in an election-winning position, according to opinion polls.

Ian Smith, chief executive of the Canberra political advisory group Bespoke Approach, said: “She listened to public opinion. She moved decisively on the matter with her treasurer, Wayne Swan, and that issue is now well and truly off the table.”

But while Ms Gillard’s political position looks increasingly secure, her government still faces criticism over perceived weakness on its handling of asylum seekers and climate change.

Even getting the new tax regime through parliament after the next federal election is no easy task, with the balance of power in the Senate likely to be in the hands of the Green party.

Bob Brown, the Greens’ leader, said he was watching the deal with the miners. “The Greens do not want the current ‘very secret’ negotiations between the government and the mining sector to result in any reduction of the initial A$12bn extra revenue forecast in the budget’s forward estimates,” he said.

While Ms Gillard is enjoying a honeymoon, it is easy for the opposition to criticise her accession to power.

Mr Smith said: “Julia Gillard was elected and elevated into the position of prime minister by the older labour movement – the factional power brokers supported by the unions – which doesn’t sit well with small businesses.”

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