Mining: The Super Profits Tax and The Australian Economy – George Megalogenis

The debate over the Rudd Government’s proposed Resources Super Profits Tax (RSPT) engulfed both government and media during June 2010. A leading critic of the tax was Australian journalist Jennifer Hewett, National Affairs Correspondent for The Australian since April 2007. George Megalogenis, political commentator, author and senior feature writer for The Australian, was more concerned at the effect on Australian politics, long term, from any government caving in to a well heeled campaign against tax reform. To discuss all this and more, Jennifer Hewett and George Megalogenis addressed The Sydney Institute on Tuesday 22 June 2010.

MINING: THE SUPER PROFITS TAX AND THE AUSTRALIAN ECONOMY

GEORGE MEGALOGENIS

I want to step back, and take this debate in a slightly different direction. I shall explain why we need a tax on mining profits. But more importantly, I want to stick up for the idea of government  – not the Rudd Government, or the previous Howard Government, or the Keating Government, or the Hawke Government or (heaven forbid) the Fraser or Whitlam Governments. But the idea that government should be able to release legislation for consideration by the parliament without fear of intimidation from any lobby group, business or trade union, in the place were lobby groups can do the most damage – electronic media.

My colleague Jennifer Hewitt makes a couple of powerful points. But a lot of these points are the push back from a lobby group that has economic weight out of all proportion to any other lobby group in Australia at the moment. The Liberal National Party Coalition has already seen a version of this movie. Conservatives believe the ACTU played them off a break in the Workchoices debate. Yet there’s something to bear in mind about the ACTU’s behaviour in 2005 and 2006. When the trade union movement brought dollars to the table in their advertising campaign, they did so after the public had seen the legislation. There had been a bit of advertising beforehand, but the campaign really began after the ACTU failed to convince the Senate to amend the legislation. To overturn the legislation after the fact, the ACTU had to defeat the government.

The miners behave as if they want to defeat the government to prevent the legislation from being tabled in the first place.

The parliament should be pre-eminent in these matters. The reason you elect people to parliament is so that they can consider legislation. If you have a problem with the legislation, pressure can be put on the Senate to change it. If you don’t get the outcome you want in the Senate, only then should the affected group consider a public campaign. Imagine if the ACTU had played the mining industry’s card ahead of the 2001 election when the Coalition weren’t looking so crash hot in the polls, or in 1998 when the Coalition were seeking a mandate for the GST.

The GST is a really interesting case study. A lot of detail was dumped on the public two weeks before the election was called. The negotiations came after the election. It never occurred to anyone, through that period when the Howard Government was making its case for the GST, for any vested interest to demand this or that tax rate. ACOSS never argued the toss on the ten per cent rate for the GST.

Let’s rewind on the past eight weeks. We have a proposal from the Henry Tax Review, which was independent of the Rudd Government. The Rudd Government accepted a fraction of the recommendations and factored them into the budget. Now we have a negotiation on the transition. On 2 May – and this is the thing that the miners will never tell anybody – the day the proposal was released, Wayne Swan advised in a press release that a lot of things were up for grabs. What wasn’t up for negation was the 40 per cent rate. Whether the miners like that or not, taxation rates are the government’s call. It then becomes the parliament’s call after the legislation is presented. It should never be the call of the deepest pockets in Australia, be they the mining lobby or the ACTU, to pre-empt these policy and legislative processes.

There has been a lot of discussion about whether the government is negotiating in good faith, and a pretty strong case to be said that the government is not really interested in negotiating on the terms that BHP and Rio, especially, are seeking. But here’s my basic problem with the position of the miners. They have been offered a dialogue. Yet they’re already in the public space, belting the government on the head, while the consultations are underway.

I believe we should reconsider political advertising with a view to banning it outside election campaigns, and on specific issues, only allowing it after parliament has had its say.

The idea that a lobby group can deploy the sorts of resources that the miners have been able to in this debate, whilst running a parallel discussion with the government, is unprecedented in our modern public life. The two sides are talking behind closed doors but one side has a three to one advantage in the advertising game. I would have preferred the government hadn’t back-flipped on its own legislation to use taxpayer funds to promote the Resource Super Profits Tax. It stands to reason that the government should not be running a so-called information campaign when the parliament hasn’t seen, let alone passed, its legislation.

But rather than call this a pox on both houses, I want to change the game. We don’t have media advertising in the final two days of an election campaign for no reason. Politicians believe the electronic media can get into a voter’s head, and two days out from the ballot box may or may not give them time to properly consider an issue. So, to extend that analogy, there should be a ban on ads whilst a policy is being negotiated with a sector.

You have to think about this as citizens. Advertising can never be allowed to pull rank on parliament. Take the GST as an example of how debates should always work, however long they take. The policy was first mooted in a report that the Whitlam Government didn’t even commission. That was the Asprey Report in 1975. John Howard tried a couple of times to get it up as Malcolm Fraser’s Treasurer. On one very famous occasion he was humiliated by Fraser who decided to tell Michelle Grattan that the tax had been knocked off before it went to Cabinet.

The GST was, indeed, a strange policy journey. Paul Keating had a crack at it in 1985; John Hewson had a go in 1991-3. John Howard brought it back for debate again in 1997-8. Now, what happened at that last political juncture bears a striking resemblance to the debate on the RSPT. The then Labor Opposition, who had only been out of office for a couple of years, saw the opinion polls do exactly what they have been doing to Kevin Rudd. In fact, if you track the Newspoll primary vote for the Howard Government in 1998 and compare it the Rudd’s Government’s standing in the first half of this year you get an almost perfect fit.

By the middle of 1998, John Howard was in free fall. The Coalition had a primary vote in the mid 30s; One Nation had blown up to the right. Labor had a near-enough-but-not-good-enough primary vote of around 40 per cent, not dissimilar to the primary vote the Coalition has today. But it didn’t occur to anyone to run ads to knock off the GST before the election policy was released. But it did occur to Kim Beazley to say no to the Coalition’s tax package sight unseen.

Beazley passed up a great opportunity to set up the reform debate going into the twenty-first century. All he had to do was offer a Labor version of the GST, without food in the base, or one pitched at a lower rate than 10 per cent.  What we got, instead, was a first term Opposition thinking the quickest way back to power was to oppose the GST outright. But they didn’t even get their tactics right. They didn’t oppose the thing and then say, if the public voted for it they would let it go through in the Senate as Paul Keating had, probably a little more honourably, said, going in to the 1993 election. If, after the scare campaign had been mounted and the public still voted for John Hewson, Paul Keating’s attitude was: you can have the GST.

If Kim Beazley had repeated that line he would have clarified the issue for the voters. What Beazley did, instead, was give people the license to vote Coalition in the lower House and take out insurance in the Senate with the Democrats who, unlike the Labor Party were prepared to engage in tax reform. Remember the Democrats proposal in 1998, going into that election, was that food shouldn’t be in the base. The Coalition and Democrat positions met after Brian Harradine said he could not support the tax. But no one thought to run ads during this period to kill the tax outright in the Senate.

Tony Abbott is Kim Beazley in the RSPT story. He wants power by default, because he was the guy who said no to tax reform.

Ken Henry is still Ken Henry, and so is Greg Smith, who worked for Treasury at the time of the GST, and was on the Henry review that proposed the RSPT. I remember scanning the GST modelling on the day of the journalists’ lock up. It said, basically, “Everyone a winner”. One of the tricks in the modelling, which took me a day and a half to work out, was Treasury had taken a snapshot of all households two years after the introduction of the GST and said, “You’re all better off’. They also assumed everyone would feel the GST at the kitchen table in the same way.

It turned out that there were quite large variations between households – those with kids, self-funded retirees, pensioners, singles and the like. We didn’t find this out until the final hour of the last Senate committee hearing, nine months into the second term of the Howard Government. It was Greg Smith who confirmed that there would be some losers in the transition.

The RSPT has roughly the same presentational problem that the GST had. Ken Henry was doing his job for Peter Costello and has probably done his job for Wayne Swan as well. He’s told you what the story would be in the long run. There are arguments about whether the long run is a five year long run or a ten year long run or a 50 year long run. The modelling is selling the ideal, not the morning after.

Let’s strip this back to the reform goal. The miners want you to think they pay more tax than anyone else at the moment, which they do. But mining companies have always paid two taxes: there is essentially a licence fee for digging the stuff out of the ground, and then they pay a company tax. And they get a tax rebate on the royalty they pay, so it is not strictly speaking double taxation. What the RSPT does, by taxing profit instead of production, is effectively replace existing royalties.

A royalty is essentially a licence to explore, so it applies regardless of how much money the mine is going to make. The RSPT takes it cut after the venture is turning a profit. Over the long run, if you tax the profit as opposed to taxing production you do tend to get more production. The question of the transition that the model doesn’t answer is that you will probably have a slowdown in production in the short term, just as the GST made some households worse off in the first year. Now these, again, are arguments to be had by the parliament, through Senate committees and the like. Not in a slick ad run between tries in the State of Origin telecast.

This is why I come back to the first principle. I don’t want to see a government, any government, lose to a lobby group before it has been able to show us the detail. If the miners win the ad war, imagine what the next election would be like. The Coalition exceeds its wildest expectations and has a workable majority in the lower House. But the Greens, who want to tax mining super profits, get the balance of power in the Senate. Tony Abbott would come to office on roughly the terms Kim Beazley sought the keys to The Lodge in 1998 by blocking tax reform with no an alternative proposal. But, and here’s the rub, Abbott as PM would be blocking the tax on behalf of a lobby group that did what no other lobby group has ever dared do in the Australian political system – run a guerrilla war ahead of the release of the legislation.

Let’s imagine what forces would be unleashed by this precedent. The day after Tony Abbott wins power, somebody says to him well, you still have this thing called a mining boom on, what are you going to do to catch the excess profits?

Some argue what does this matter, when Kevin Rudd is having trouble at the polls at the moment. The louder Abbott says no, the sillier Rudd looks. But why would Labor treat an Abbott Government any differently? What would stop Labor in opposition thinking the Abbott way and deciding the easiest way to get back into power is to say no, again. Bear in mind, an Abbott Government would likely face a Labor-Greens Senate.

The reason we are in this mess is that everybody thinks the answer to a question is what they thought of that morning. We have had an avalanche of information in this era. Over the last ten years everybody, politician, journalist and lobby group, have faced the same contradiction in public life. We have access to more information, but the public attention span is not was it once was, so debates disappear before they can be properly had. Our public figures are diminished by the amount of time they spend each day feeding the media beast. No question is too small for a prime minister now; no question is too weird for an Opposition leader if he is wearing a crash helmet. What sort of celebrity kick are we on if that is what we’ve reduced politicians to?

I know they did it themselves and I know there was a bit of journo brain-ticking in both Kevin Rudd and Tony Abbott. One of the reasons the Rudd Government looks so shrill and why the RSPT seems to have come as a bolt out of the blue for everyone is no one has the patience to explain, and to listen, anymore. Everyone expects the RSPT to be wrapped up in a week at the latest. Not a month, but a week.

Governments shouldn’t ditch policy because one poll turns against them. I take you back to the GST. The GST was never popular. Newspoll polled it every which way. I wrote some of the questions so I know what we wanted to know from households. Nobody ever accepted the tax in its own right. But ask people the other question – do you think it is a good idea for the country? They answered yes. And by the time it was legislated, the GST had been well and truly debated and it had been sold, and implemented. People wanted to move on to other issues.

You don’t tip a government out because it proposes a tax that people aren’t immediately comfortable with. In fact you encourage your governments to do this sort of stuff. This is why I come back to the first principle here, the ability of the parliament to act in the national interest without fear or favour. The mining industry should not be in the public space. I know they think they should be and I know they’ve got some good people working for them. Some of my good friends work for them. But think about what it really means to have the best political talent from both sides working for the Minerals Council, BHP or Rio. As I said, some of them are good friends of mine. But the economist in me sees a classic case of crowding out. If the sharpest political minds in Australia are with the dollars, and these dollars are the sorts of dollars that no one has seen before in PR and government relations, then no other business or welfare lobby group can compete with the miners.

The reason to support the idea of government in a debate like this is to preserve the power of parliament over vested interests, be they capital or labour. The alternative to go down the American road, where every vote is for sale to the highest bidder.