Let’s call it a “super profits” tax

Just how incompetent was the Rudd/Swan team in the last term?

Over the weekend, and in the week prior, the following captains of industry and senior officials advocated a sovereign wealth fund to help the Australian economy fend off the effects of Dutch Disease:

  • Glenn Stevens, Governor of the Reserve Bank
  • Roger Corbett, Chairman, Fairfax
  • Brian MacNamee, CEO, CSL
  • James Mackenzie, Chairman, Mirvac
  • Ralph Norris, CEO, Commonwealth Bank
  • Ian Johnston, CEO, Fosters
  • Grant King, CEO, Origin Energy
  • Chris Roberts, CEO, Cochlear
  • Richard Goyder, CEO, Wesfarmers
  • Executives at Lend Lease, Tabcorp and Coca-Cola Amatil

This is the creme de la creme of Australian service industries, which represent seventy-odd percent of the economy, plus it’s most senior and powerful economic manager, as well as the Chairman of one half of the Australian media duopoly.

This is a dream team of supporters for a government seeking to introduce a policy that addresses Dutch Disease. There’s huge employers, credible economists and media clout to control the agenda.

Yet this blogger cannot recall any one of these folk supporting the Rudd/Swan proposal for the Resource Super Profits Tax (RSPT) which was, explicitly, an attempt to remedy Dutch Disease.

How is it that none of these “leaders” broached the notion of a fiscal stabilisation facility during the RSPT debacle? Any one of them could have helped deepen the debate beyond what it became, a gunfight between the government and mining interests.

Some of the reticence is probably an expression of the boys club of Australian business executives and the general populism of our culture. Despite seeing ourselves as lovers of the maverick and the larrikin, we are, in fact, a deeply conformist society that lops the head from too tall a poppy. Sticking your head out amidst that furious business rebellion was no easy matter, as this blogger found for himself at Business Spectator.

And that is where we get closer to the prime cause of that national failure (for that is what it was). How did Kevin Rudd and Wayne Swan create a political environment in which even the natural allies of those seeking to mitigate Dutch Disease felt unable to speak out?

The easiest way to understand how extraordinarily poor their execution of the policy process behind the tax was, is to look back at how the similar Petroleum Resource Rent Tax (PRRT) was created in the early eighties.

The PRRT was official Labor policy in opposition for two years before the 1983 election. During that time in Opposition, an extensive debate was stimulated around the need for the tax. The general public was first educated of the need for the tax then converted to its cause.

When the tax was made policy in 1984 in government, a similar backlash came from the businesses it targeted. They howled of its unfairness and threatened to flee the country, just as the majors did during the RSPT debacle.

But the populace was already on side. The affected interests couldn’t destabilise the government.

Another important difference was that the PRRT was applied only to new or greenfields projects.

This time around, we had a secret policy, foisted on all and sundry, with no public debate and a compressed timetable with an approaching election. The entire episode lasted an unbelievable 7 weeks from the announcement of the tax to the downfall of Kevin Rudd.  7 weeks!

None of that is to argue that the RSPT was, in detail, a good policy. This blogger agreed with criticisms that the proposed loss rebate mechanism was unrealistic and the trade-off profit share dimension reminiscent of expropriation. Of course, the proposal did not include an SWF either.

But Rudd and Swan had both had access to the corporate memory that executed the PRRT. The original tax was based upon a dissertation by the current Minister for Trade, Craig Emerson, and it was implemented under Hawke’s economic advisor, Ross Garnaut, who is currently advising the government on climate change mitigation.

Had this experience been tapped in a better managed policy process and debate, the flaws of the RSPT could have been thrashed out, supporters of a new approach to managing Dutch Disease heard, and a decent and balanced tax might have emerged. If that is overly optimistic, at least the earth could have been tilled and the public educated for an attempt down the road.

Instead we have a $100 billion Budget black hole, a political economy poisoned against any increased resources tax, damaged firms that other countries don’t want around, and no real path forward for a substantial SWF.

Kevin Rudd paid a terrible price for his mismanagement. The man most directly responsible, Wayne Swan, was promoted to Deputy Prime Minister.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Comments

  1. I think public opinion would have been harder to sway this time round anyway.

    The meme is solidly entrenched in the public’s thinking that mining is Australia’s golden goose. The looks people give you when you point out that mining is only a small contributer to the economy overall are remarkable – you’re questioning basic common sense. Most people have no answer as to how the “golden goose” can be presently running almost white-hot, yet general enconomy-wide conditions remain fairly tepid, or as to how a sector that supposedly saved us from the GFC did so while shedding large numbers of jobs (relative to the tiny contribution it makes to the broader labour market). I live in a resource town and witnessed many people lose their jobs.

    If the majority believe that mining is the driving force behind the country’s preosperity, selling any new tax on it will be exceedingly difficult and whipping up a storm of nonsensical hysteria (they’ll pack up and leave and we’ll all be rooned!) will be – and was – quite easy.

    • Agreed Lefty. The RSPT scare campaign was an easy win in a quarry economy mindset. About as easy as carbon tax scare campaign 2.0 will be for Abbott in coming months.

      I don’t really blame Rudd — he was never going to win this one — the problem is every economist and his dog (Gittins!) telling us how wonderful the mining boom is for us all.

      As for pricing carbon, you’d get much a longer list of CEOs and economists to pledge support for it, but it has Buckley’s of ever being implemented. Meanwhile, a hundred coal ships queue up off Newcastle and Bundaberg. The idea that this country will ever tax carbon is absurd.

  2. You two seem to have missed my point.

    The mismanagement was precisely expecting to push through a tax in seven weeks.

    It should have been planned as a long campaign, years…

    • I agree. Rudd introduced the tax without even consulting the Mining Minister! It was like they dreamed up the tax at the pub on Friday night and blurted it out to the world on Saturday morning.

      Companies like BHP and Rio manipulate governments of the world for a living. What was Rudd thinking?

    • I still think Rudd/Gillard/whoever would have lost the battle and the war. As the quarry economy mindset becomes more entrenched, it will become more difficult to tax the golden goose.

      Ok, they could have managed things better. Rudd could employed his 2007 political capital better. Whatever you think of Howard, it took courage to backflip on “never ever” and push through the GST. Rudd never showed that courage on the RSPT or the CPRS.

  3. Good analysis, please let me add that:

    1. It (the KRudd Mine Tax) was so badly put it seemed to be more a misplacement of trust (it was so damned obvious from the outset) in a premeditated strategy to capture Rudd’s chair,

    2. While the winner and prime suspect was JSwan (no surprise here as there doesn’t appear to be much that matches his skill sets except crasse treachery),
    3. And, Abbot’s lack of pick-up and whining goes to show that he is far – far beyond his skill sets as well. (God help us all if he ever becomes PM – he needs a padded cell)

    4. I state that the Mineral Rent Tax or whatever it is to be called is undoubtedly the way to go but at the same time many existing taxes on the lower earners need to be abolished. IOW Tax reform is a huge issue that no body can see as vital where imposition of knee-jerk taxes – for whatever, are paramount… but to what? The matter of favoured foreign shareholders and dividends needs to looked at.

    5. The recent climatic disasters (nothing unusual) saved Gillard’s life and boy, did she wallow in it playing the emotional game to the ‘enth by waving an old flag and crying tears (crocodile) from the benches. Signs of utter desperation. The only tune she didn’t play on was the violin.

    6. But then she conjured up the Brisbane flood tax, on-the-fly, with floods in Victoria – 2 cyclones off the northern Q’ld coastline and x1 off the WA coast. Another flop. And what about the Insurance fraud? Nothing…

    7. And now the bank lobby’s Carbon Tax – another mess made in presentation (knee-jerks infinitely yours)… and ill-founded in banker pseudo science bought and paid for by the cancer of the “neocon” network.

    8 ‘Ad nauseum’ now presents the Bankers wet-dream team and the ultimatum for the “fund” – what a crock… and this treacherous lot would sell their mothers for a bob, and only get together for the final harvest for satanist revelry.

    Bottom line: Australia is falling and more, rapidly accelerating now, into the abyss – and there is no person in “leadership” anywhere on the horizon doing anything for this Nation’s future – nothing apart self agenda – selling Australian’s to the US execution teams to feed the PNAC, and doing arbib sales of spyware.

    The only persons in the World that are showing any form of responsibility, respect for their fellow citizens and the future of humanity are the Bloggers/Heretics and this my dear friends, is where our future so vitally, lies.

    Today’s Heretics are tomorrow’s conservatives. Keep on Blogging for it is The Spirit of Truth that will save us for the materialistic inepts.

  4. A few points I would like to make: a sovereign wealth fund is almost an oxymoron. Sovereign nations create money when they spend. They destroy money when they tax. The tax money cannot be “squirreled away” for a rainy day. It no longer exists. The sensible thing to do for governments of nations with favorable terms of trade due to a mining boom is to spend big on infrastructure, education and technology. Build now the infrastructure you will need twenty years from now, and in twenty years time (when maybe things are less favorable for the nation) you don’t have to build it.

    As regards the idea of a “super profits tax”, this is OK as long as people recognize that it makes government revenues more susceptible to large variations with the business cycle. Thus it should be used mainly to fund large, non-recurrent expenditure items like the NBN or similar infrastructure projects. If the government ever starts to depend on it to fund recurrent expenditure in a big way, they are on the road to perdition.

  5. I agree with your main point H&H. If I remember correctly it was the latest Quarterly essay by George Megalogenis that mentioned Mr Rudd was operating at a speed of 3 announcements a day to keep the media satisfied.

    The current PM has locked onto 2012 for a budget surplus and now for a carbon tax as well. Somewhat akin to Mr Rudd locking onto the RSPT.

    Right now the government is spending more than it is earning. If the government starts diverting cash from its mining profit tax stream into a holding account that moves them further away from a budget surplus in 2012.

  6. “I still think Rudd/Gillard/whoever would have lost the battle and the war. As the quarry economy mindset becomes more entrenched, it will become more difficult to tax the golden goose.”

    I stongly suspect that’s the case, Lorax.

    Houses and Holes, I take your point but I would not underestimate how difficult selling such a thing to the public is, even if you ran a brilliant campaign (which he certainly didn’t, as you point out). And how easily it is for vested interests to derail.

    You have to convince the electorate that much of what they think they know about mining being the “golden goose” is ficticious. Challenging any widespread entrenched belief is politically dangerous at the very least.

    Everyone “knows” that mining is the number one driver of prosperity and economic growth in Australia because mining boomed for years coincident with strong growth and low unemployment (by the NAIRU definition at least) right across the country. That this may have had less to do with mining and more to do with a huge credit boom is a futile argument most of the time – the meme is solidly entrenched.

    I’n not saying that it’s impossible to overcome, simply that it is both difficult and dangerous for a government to try.