Murdoch lands a plum role ahead of the election year

When Australians welcomed 1996 in earthy style, with fireworks over Sydney Harbour and revellers hurling beer cans at hapless policemen along Bondi Beach, they also ushered in the year of a general election. Paul Keating, the Prime Minister, is expected to call a poll as early as March, seeking an unprecedented sixth term for the ruling Labor Party.

The campaign will focus irredeemably on Labor's economic management after 13 years in power. But it is also likely to highlight the government's relationship with one of Australia's most powerful men, possibly even more powerful than Mr Keating himself: Rupert Murdoch.

Mr Murdoch spent the Christmas-new year holidays as a crew member on Sayonara, the United States yacht that won the annual ocean-going yacht race between Sydney and Hobart, Tasmania. While he was at sea, a political storm was raging on shore over a deal stitched together a year ago between Mr Keating and Mr Murdoch to allow the media tycoon to build a film studio in Sydney for 20th Century Fox, the Hollywood production company owned by Mr Murdoch's News Corporation.

The row focuses as much on the proposed studio's site in central Sydney as it does on the Labor government's manner of doing business with Mr Murdoch in an election year. He controls almost 70 per cent of Australia's newspapers and one of two cable television networks.

The proposed location is the Sydney showgrounds, a 27-hectare site that has been the home of the Royal Agricultural Society for 114 years. For most of that time, the society has staged the annual Royal Easter Show there, an elaborate display of agricultural wealth.

With the society planning to move location next year, the question has been raging over what to do with such a prime piece of public land. The showgrounds form part of wider parklands that Lachlan Macquarie, one of Australia's most visionary colonial governors, dedicated in 1811 "for the benefit of all present and succeeding inhabitants of Sydney".

The question at the centre of the row is: would a Fox film studio fit such a definition? Many are sceptical. The New South Wales state Labor government, a political ally of Mr Keating, has gone ahead with the Fox proposal without calling other tenders.

Fox would be handed almost the entire site, at a peppercorn rent for 50 years, leaving no land for public use. To make the studio pay its way, there have been suggestions that Fox would incorporate a movie theme park, something that has caused uproar among inner-Sydney residents.

A group have formed Save the Showgrounds for Sydney Inc, hired lawyers and won a restraining order against Mr Murdoch and the state government until a full challenge is heard in the Land and Environment Court this month.

Australian film-makers, keen to see movie sound stages built in Sydney, are wary of the Fox plan. Many believe Mr Murdoch wants to use the studio to churn out American-based "product" for his world-wide television network rather than give access to Australian productions.

The 18 Australian feature films shot in 1994 had total budgets of A$43m (pounds 20m): small beer compared with the average Hollywood budget. John Maynard and John Weiley, two Australian producers, said in a recent article: "Each new admission by Fox makes it more obvious that the development is not driven by the needs and priorities of the Australian film-making community. Along with many of our colleagues, we believe it will be culturally damaging and divisive and that ultimately, if there are any benefits, they will accrue to the shareholders of Fox."

With appeals to Australian nationalism so much at the centre of Mr Keating's strategies, the Fox row would seem to open a window for the opposition Liberal-National coalition to make political capital.

But with an election around the corner, and Mr Murdoch's newspapers playing such an influential role, both sides of politics are holding their breaths.

John Howard, the opposition leader, has said nothing about the Fox controversy. He has yet to reveal the details of his main policies. When he does, an attack on the expanding empire of Mr Murdoch, however much public disquiet that causes, is unlikely to be among them.

The opposition leads the government in opinion polls, but Mr Keating has overtaken Mr Howard in recent months in polls for preferred prime minister. Voters see Mr Howard as honest but weak; they regard Mr Keating as untrustworthy but strong and tough.

If anything, Mr Keating is facing a more favourable economic climate for the 1996 campaign than he did three years ago. In 1993, the press wrote him off and branded that election as "unwinnable" because of his personal unpopularity as the finance minister who had taken Australia into the recession of the early Nineties. Now, the economy is growing at 3.5 per cent and inflation is easing. The share market closed last year 15 points higher than 1994.

Business leaders have criticised Mr Keating's government for failing to push through harder micro-economic reforms on the labour market, transport and waterfront. Overall, though, business has learned to live well with the Labor government. "It's very pragmatic and not driven by ideological objectives," said Ian Spicer, managing director of the Australian Chamber of Commerce and Industry. "It has moved increasingly to the centre. To that extent, business has had a reasonably good relationship with the government."

The Murdoch factor remains the wild card. Late last year, Mr Murdoch unnerved the government by describing the Australian economy as "a disgrace", citing the high rate of youth unemployment.

Mr Murdoch will be demanding more than just land for his Fox studio from whoever wins the election.

He will be seeking, as well, a complete revamp of cross-media ownership laws that set strict limits on television ownership for newspaper barons.

Michael Gordon-Smith, executive producer of the Screen Producers' Association of Australia, appealed for caution.

"Mr Murdoch and his companies have an enviable capacity to influence the rules of government - or to find ways to circumvent them."