At a Liberal function in his Warringah electorate last Friday night Tony Abbott, just back from his indigenous trip, was in full campaign mode. “Geed up, determined, positive,” said one party attendee, adding “he’ll fight to the last breath to be re-elected”.

Fight is what Abbott does best – but this penchant for pugilism is his great weakness as well as a strength.

The prime minister, who won power two years ago on Monday, is most at home in combat, whether on the domestic campaign trail or escalating Australia’s commitment to a battle abroad.

A Liberal parliamentarian, highly critical of Abbott, describes his current approach to government as “doing what comes naturally – he’s trying to be a warrior. He’s relying on a small circle of advice; he’s going back to areas he’s comfortable with.”

The great failure of Abbott’s leadership is that he had not been able to transcend his innate instinct for conflict. He leads a divisive government, which has become an authoritarian one.

Not just current opponents but those vanquished and off the field must be pursued. Critics not only have to be discredited but demonised. The culture wars are at a new intensity, with the “media wars” a dominant sub-set. Internal dissent is defined in the first instance as disloyalty – until it turns threatening and the rebels need to be bought off with promises to listen and be more responsive.

Dan Peled/AAP

In the Abbott government’s second year, the them-and-us tribalism and high degree of ideology that marked its first have become even more noticeable, whether the “out-tribe” is in the community, the media, the cabinet, or the Liberal Party.

We observe this in such diverse examples as the absurd obsession with the ABC’s Q&A program, together with the unabashed use of News Corp’s Daily and Sunday Telegraphs and The Australian as bulletin boards (the latter cheerfully referred to in the bureaucracy as the “government gazette”); the excessive attacks on Human Rights Commission President Gillian Triggs; and the marginalisation of the full cabinet, where critics have voices, on too many occasions.

The past 12 months saw two first-term state conservative governments despatched, an alarming reminder to a struggling federal administration. Policy retreats from the first year’s budget have included the Medicare co-payment, while the push to deregulate universities has failed to clear the Senate. The upper house remains generally difficult, although a softer second budget and improved negotiating skills have led to some steps forward.

Two years into power, Abbott’s approach is “whatever it takes” on issues of policy and survival.

The way Abbott handled same-sex marriage gave a sharp insight into his political character. It was not the fact that he punted it off. It was that, when the pressure came on after the Irish referendum, he encouraged Liberal supporters to get together a cross-party bill, while privately making it clear he intended to stifle the issue.

It showed a level of trickiness that was not obvious, at least to this writer, when Abbott was a Howard government minister.

In February a deeply disillusioned Liberal backbench, angry at the command-and-control style of the Prime Minister’s Office (PMO) and especially chief-of-staff Peta Credlin, fearful about the bad polls, appalled at the Prince Philip knighthood “captain’s pick” and shocked at Campbell Newman’s Queensland defeat, gave Abbott a huge scare with a spill motion that mustered a substantial 39 votes, to the 61 against.

In September, the polls are still bad, the governing erratic and the PMO as powerful as ever. Abbott’s over-long clinging to Bronwyn Bishop was regarded as the most recent bad “captain’s call”.

Lukas Coch/AAP

The disgruntlement in the cabinet has grown, with the disaffected willing to air their policy differences through leaks and public comments, as happened with the citizenship changes and same-sex marriage.

The team has begun to cannibalise itself. Senate leader Eric Abetz suggested ministers who disagreed with the Coalition’s marriage policy should quit. House leader Christopher Pyne is no longer rusted onto Abbott. There have been reported leaks from cabinet sources promoting the need to replace Treasurer Joe Hockey as a way of protecting Abbott if Canning goes badly. Hockey has hit back at “fringe whingers”. “Everything is pretty fractious,” says a frontbencher.

Abbott’s reading of the riot act more than once over high-level ill-discipline has had no effect, except to expose his impotence.

Normally ministers chide unruly backbenchers. Queensland Liberal Ewen Jones turns this on its head: “The government is functioning solidly; the backbench is rock solid in prosecuting the message; the cabinet appears to be the trouble. If ministers have a problem, ‘fess up and move on.”

By his manoeuvred outcome on same-sex marriage, Abbott increased his support in the right-dominated party room. The conservatives will support him, if he backs positions important to the hardcore “base”. This makes his position safer, as does the fact that there is not one alternative, but two or three (Malcolm Turnbull, Julie Bishop, Scott Morrison), and the enormity of replacing a first-term prime minister after what happened under Labor.

But while more secure, Abbott’s position is not “safe”, with Canning being cast as a test, the polls bringing constant markers and electoral panic a powerful force.

In Canning, which the Liberals are expected to win – they have an 11.8% margin – diehard Liberal campaigners report very bad feedback on Abbott.

Despite the government’s weaknesses and troubles, in the higher reaches of the Liberal organisation there is a level of complacency. They think they’ve seen it before, in 2001, when Howard came back from the political dead. But Howard was a deft strategist and assisted by special circumstances as well as his own efforts. Abbott himself is said to retain a good deal of self-confidence.

There are flashes, occasionally, of another Abbott. Liberal MP Warren Entsch, who has had his moments with the leader, said after observing him on the Indigenous trip: “I’ve seen him at his absolute best this week. You could see the real Tony Abbott. He gets down; he gets dirty; he works with [the Indigenous people]. It’s a very different Tony Abbott to what is generally being projected in the national media.”

Among those deeply disappointed with Abbott are many in the business community. Despite the government’s early talk, it is having trouble delivering much of what business wants. One source says: “The business community is dying for him to succeed. But they are concerned at the lack of consistency and clarity. A lot of division has opened up in the government. And people are not listening to the treasurer.”

Another business source says pithily: “Business wants a little less conversation – a little more action. Business is wondering, what’s the point of having a sympathetic government if it’s not prepared to deal with the substantive issues?”

A third says: “We seem to have forsaken policy for politics. They’re having trouble getting a message together, let alone out.”

What the government intends to propose on taxation, reform of the federation or industrial relations is anybody’s guess, as is how it can deal with repairing the budget in the foreseeable future.

Talk about changing the GST goes up and down like a yo-yo. The government can neither rein in the parrot-shop chatter about “reform”, or deliver on the multiple demands from stakeholders who insist, and they did at the recent “summit” which filled a vacuum left by the government, that they support change. But mostly, it might be added, only if it does not hurt their interests too much.

On economic reform Abbott and Hockey are a dysfunctional couple, while time is running out to get a blueprint together for the election.

Hockey has displayed poor judgement, minimum political nous and an inability to convince either the public or crossbenchers.

One Liberal makes the obvious but astute point: “A lot more could have been achieved if the first budget had been thought out by adults.” The hubristic unreality of that budget, which alienated the public and threw the government off track, has blighted the Coalition’s first term so far, despite its more benign successor.

A senior Liberal says: “It’s like in two years they’ve got to the stage of an exhausted government.”

The traditional mantle the Liberals have relied on – that they are competent economic managers – has become very thin. This week’s national accounts – with growth at a tiny 0.2% in the June quarter and a low 2% annually – underline the government’s problems. It is confronted with a sluggish economy and inadequate revenue, when it is committed to “lower taxes”.

Abbott is putting much political dependence on national security – it has “almost become a crutch”, as a government MP puts it – but even some in Liberal ranks think this hand is being overplayed.

For all the talk of the “death cult”, which Abbott suggests is worse in some regards than the Nazis were – “the Nazis did terrible evil but they had sufficient sense of shame to try to hide it; these people boast about their evil” – there is nothing like the alarm that September 11, 2001, and the Bali bombings generated among the public. So far, Abbott’s efforts to force Bill Shorten to peel off on security issues, whether tougher domestic measures or deeper engagement against Islamic State, have failed.

Abbott became the accidental leader when in opposition he defeated Turnbull by a single vote in 2009. He has never transformed himself into the natural leader. He walks with a permanent political limp.

If Abbott survives to the election and then manages to win it, he’d likely still continue to be dogged by leadership speculation. Assume he was returned with a narrow majority: can anyone doubt there would soon be pressure to replace him in the second term?

Listen to the Canning by-election special episode of the Politics with Michelle Grattan podcast here, or on iTunes.