“We’re never going to win this battle,” said a third MP. The union movement is escalating pressure in key marginal seats by mailing thousands of leaflets claiming the local Coalition MP voted against a banking royal commission but is in favour of tax cuts for the big banks. Government backbenchers said they could fend off the union campaign but were worried about the political pain of a policy that could not be legislated. “We get the union campaigns all the time and that doesn’t bother us,” one MP said. “But you want to make sure that if you cop a pasting you have a win at the end of the day.”

The government outlined the company tax cuts in May 2016 budget and has already legislated the first phase of the plan, giving tax cuts to companies with turnover of up to $50 million at a cost of $29.8 billion over the first decade. The second phase, costing another $35.6 billion over the same period, has lost support in recent months with Victorian independent Derryn Hinch concerned about rewarding big banks and Senator Hanson's bloc of three now reversing their previous support. Corporate Australia now largely recognises the bill can't pass Parliament but has warned the government against abandoning it althogether, claiming a failure to follow through would hurt "six million mum and dad" investors. Loading Replay Replay video Play video Play video Australia's gas and mining giants also labelled One Nation's demands "incoherent" after Senator Hanson demanded the sector pay an extra $6 billion in tax and hand over its gas to local markets in exchange for her return to the negotiating table.

"One Nation claims it wants more exploration but it is pushing tax changes which will increase the cost of exploring," said Australian Petroleum Production and Exploration Association chief executive Malcolm Roberts. "Increasing tax and regulation does not attract more investment or lower the costs of supplying gas." With opinions divided, the government faces a choice over whether to try again in the Senate, put the policy to one side while keeping it in the budget or removing it from the budget entirely in order to blunt Labor attacks on the “handout” for big business. The third option would also see the government focus all its energy on the personal income tax cuts, sharpening the contrast between the Coalition’s plan to cut taxes by $140 billion over 10 years compared with Labor policies that add at least $158 billion to the overall tax burden. Some Liberal MPs told Fairfax Media the government should hold its nerve because there was a “very strong” case for the plan to expand the economy.

“This has been a key part of our plan for the economy over the last two years and it’s important we don’t walk away from a policy that we’ve said is so important for business and our competitiveness,” said Liberal MP Trent Zimmerman. Another Liberal, Trevor Evans, said the dividends were already flowing with record employment growth. “The argument for the policy becomes more cogent as we see the lived experience of the first few years of the plan,” Mr Evans said. Senator Hanson’s decision took the government by surprise and came after ministers had expressed confidence in their prospects for the reform as recently as Monday.

One supporter of the tax cut, Liberal Democratic Party senator David Leyonhjelm, said there was still a chance for the reform as Senator Hanson held out for more concessions from the government. “Pauline changes her mind as often as her undies, so I don’t think this is the final word,” Senator Leyonhjelm said. Loading The One Nation backflip comes amid early discussions over preference deals in the Queensland seat of Longman, but Fairfax Media was told the Coalition had not sent any signal over preferences that would have provoked Senator Hanson to renege on her agreement on tax plan. Finance Minister Mathias Cormann said the government would go to the next election with the company tax cuts as its policy, but he also conceded the plan might not be legislated in this term of Parliament.