Mining The Super Profits Tax and The National Economy – Jennifer Hewett

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 NATIONAL ECONOMY

JENNIFER HEWETT

I’ve covered politics and business politics for a very, very long time and I find the Rudd Government’s handling of the mining super profits tax extraordinary; so much so that I’m actually amazed anew each day when I think about this and the long-term harm for the economy. I don’t think I’ve ever seen something quite as important which has been so inadequately approached and so badly understood by the government selling it.

Usually, as a journalist, I certainly try to be objective, to evaluate good and bad government policy. As an economist, you can see on the one hand this and on the other hand that. But this one is different. I remain almost incredulous at the way the government has approached this tax. I don’t think there’s any doubt that investment in the mining industry will decrease rather than increase if this tax goes ahead as planned. It’s already doing damage to Australia as an investment destination over the long term with people in all sorts of areas and all sorts of countries saying, “What is Australia doing?”

Australia is used to being regarded as a fairly stable investment destination. Suddenly, in the last two months, that has drastically changed. That is a pretty extraordinary feat for the government. The prime minister talks about fact and fear. And the gap between rhetoric and reality is always an issue for any government, any politician. Fair enough. But I don’t think that we’ve ever seen such a gap before, between what Kevin Rudd has promised and what he has delivered. In that sense the Resource Super Profits Tax (RSPT) is a big enough issue of itself. But it also acts as a lightening rod in demonstrating other weaknesses of government.

The RSPT reinforces and dramatically highlights the flaws in the structure of the government, the way it approaches things. Kevin Rudd does not consult, not just with the mining industry but with his own cabinet, He hates to hear criticism and blocks out tough advice that he may be wrong and need to reconsider. For example, the Resources Minister, who understands projects finances, and his department was completely left out of this whole thing until the very last minute. This is amazing. The problem with Kevin Rudd, as a senior Labor figure told me in opposition, is that he always had to prove he was the smartest boy in the room. Rather than growing into the job and trying to draw on the breadth of his colleagues in a way that Bob Hawke did, Rudd has used his prime ministership to concentrate a sense of power, to reject questioning of the notion that he knows best, that he is still the smartest guy in the room. When this is revealed not to be true, certainly in common sense applications such as this mining tax, Rudd is exposed very personally as well as politically and that’s what’s happening now.

Tony Abbott can of course hardly believe his luck; he calls it “amateur hour experimenting with Australia’s future”. This has some validity because the government doesn’t actually know how to get out of its dilemma. It wants to appear to consult and to compromise in the national interest, or at least it wants to appear to be doing so, but of course it doesn’t actually know whether it does because this tax is certainly very important to it. The government wants to avoid any suggestion that it has backed down on its original proposal.

That is why we will hear Kevin Rudd talking incessantly about long-term reform while, in fact, there are many contradictory signals. The government earnestly says its knows that the public likes things to be fixed, and thus it is engaged in real consultation and negotiation with the miners. The Prime Minister is very keen to be seen to be taking charge of this; he’s had private meetings with people like Marius Kloppers and Andrew Forrest. Then, just ahead of the Newspoll last week, he got Marius Kloppers, David Peever and Peter Freiburg to talk with Wayne Swan and Martin Ferguson, So far, of course, to no avail.

The miners do understand that this is about appearances rather than substance. They quickly put out a statement, after that meeting, that there was no formal acknowledgement the government would address their key concerns in terms of retrospectivity, competitiveness and stability. I think you’ll see the government try to do a few little separate deals and talk them up in terms of how reasonable they are, and how reasonable people are. There could be a deal with the coal and gas industry – the most likely option – but there is no real sense that the government is prepared to radically rethink the tax. One reason is that, at the very top of government as opposed to nervous backbenches and certainly some ministers, they are still very confident that Tony Abbott is unelectable. There is a firm belief that Rudd can turn the tide on this tax and promote it as a major reform in the national interest. The government thinks the noise will go out of the debate and allow it to concentrate on issues abroad, or economic management. Every day in question time this week, they’re talking about broadband and the great success of broadband while the opposition only wants to talk about the mining tax.

A lack of consultation, such as with the mining tax, has never been the method for successfully getting major reform in this country. That’s even when policy deserves the name of major reform; this actually does not. This is more a self-defeating, muddle-headed theory dressed up in the clothes reform. The interesting thing is that most voters, particularly in resources states like Western Australia or Queensland or South Australia, don’t see this as reform.

Now the question is whether the government can do anything to get out of the mess that it has created and so far the signs aren’t promising. Kevin Rudd is not very convincing at being conciliatory; Wayne Swan as we’ve seen over and over again doesn’t even try. The language that Swan has used about some of the senior leaders in the mining industry is unprecedented – calling them “liars” and “incompetent” and accusing them of strong-arming others. Swan seems to think it is all simply a scare campaign by Rio and BHP to avoid paying more tax. In that context, it’s interesting to look at how this tax came about.

Let’s rewind to the 2020 Summit and the enthusiasm of the government to have some concrete proposals out of it. David Morgan was organising the business stream and he pushed the idea of a comprehensive review of the tax system. The government, very keen to have practical proposals to promote, leapt on the idea. Thus the Henry Review was born.

But there were lots of problems with this Henry Review when it was delivered in December 2009, including the fact that the government had no clue what to do with it. Rudd and Swan were very nervous about how to cope with the idea that they had had a big review but didn’t want to implement most of it. But now we know what they did do. The Treasurer went for his surfing holiday and read the Henry Report. Then he came up with this grand plan of a mining tax which suited the government in a variety of ways. It fitted in neatly with traditional Labor orthodoxy. The belief in a special tax on non-renewable resources dates back to a Labor ambition in the 1970s. Ken Henry tried to widen that again, in a very extraordinary intervention yesterday, by saying a super-profits tax should apply to all sorts of industries. The government  has quickly shut that down today.

The Hawke government introduced the Petroleum Tax in the mid-1980s as a direct result of this belief in taxing non-renewable resources. This of course was a new industry, one not affected by State royalties so much. The tax was regarded as a relative success. That’s why the government has thought it could replicate it, except Ken Henry had a much better idea; an even more elegant economic theory that he could try and persuade the government of and golly he was actually able to. In that sense, I do blame the politicians more than the public servant.

Ken Henry was, in that sense, just doing the job that he was given. It was up to the politicians to consult and discover that the elegant theoretical model that Henry had devised needed real life exposure before being unleashed as policy. But, as we know now, those politicians did not do this. They deliberately did not do that and there is no doubt that the combination of Kevin Rudd, Wayne Swan and Ken Henry turned out to compound each other’s errors of judgement. Te sum of the whole was worse than any of the parts.

I was deeply sceptical about the tax on 2 May, the day it was announced, perhaps because I’m from Western Australia. But the more I learned about it, the more horrified I became. Everyone can believe in the principle of more tax; the principle of a profits tax is fine. But when you go into this proposal, and you see how they’ve done it, it’s incomprehensible. The impact has been, if anything, a slow burn even amongst the mining industry. I remember a telling line from somebody clever saying “anyone who wasn’t confused about the mining tax didn’t understand it”. It did take a while for the disaster to sink in with the industry. They also had to get over a sense of disbelief, but also betrayal. They had actually been deliberately kept in the dark for months.

The miners had been told, over and over, by the government not to worry about any tax reform of mining taxes. What they must not do was complain in public and things will work out. Of course, they were completely ambushed on 2 May. Imagine their surprise. Ever since, the government has been basically saying to them to quieten down. But the miners don’t believe the government anymore. And this demonstrates how arrogant the government has been from the very beginning.

The Rudd Government needed to be able to sell its commitment to tax reform, particularly as it wasn’t doing anything else. And it needs to get money so its budget will be back into surplus. What better, then, than a tax on the mining industry. It’s hard to overestimate here the grievous errors of both politics and policy.

Politics first. When the government announced its new tax it was keen to say from the outset that it expected a well-funded scare campaign. They didn’t say that they thought it would come almost entirely from BHP Billiton and Rio Tinto. They appeared to think it would be relatively easy to demonise big miners, particularly those with dreaded foreign share holders, while talking about superannuation and tax cuts to small businesses and extra infrastructure. That was the whole “fair share” thing for Australians. Who could argue against that?

All this badly underestimated the increased sophistication of Australians about the causes of their relative wealth and the notion that perhaps there were risks in targeting the industry that the government had just spent so long boasting about as one of the key strengths, apart from themselves, of the economy. The government also thought that although companies like Rio and BHP would complain, given they’d be liable for quite a lot of that tax, the government’s guarantee for a 40 per cent concession rate for expenses, even if projects went bad, would be very popular amongst small miners.

Paul Keating used to say that good politics follows good policy but this miscalculation was truly remarkable on any number of levels. It demonstrates how bad politics follows bad policy. The small miners, had they been asked, could have advised the concession was not an advantage in getting finance. Andrew Forrest of Fortescue Metals explained that Fortescue wouldn’t exist if the tax had been in place a few years earlier because he wouldn’t be able to get project financing. Nobody believed the government’s concession or concessional rate. It wasn’t the right uplift factor and miners didn’t value it.

None of this had much effect in Canberra where officials refused to acknowledge the real world in their figurings. Treasury had never done project financing. I’ll never forget going to a briefing soon after the budget. George was there as well. It was extraordinary. Ken Henry was actually proud of the fact, which he repeated in public a week later, that he had not consulted bankers or miners because he was very pleased with his theoretical model. He thought it made much more sense not to deal with pesky complaints from people who didn’t understand or appreciate economic theory. The fact that the Treasury didn’t understand how the market worked didn’t seem to faze him.

When banker after banker, and miner after miner, explained to Henry that his model wouldn’t work in the real world, and that it would cost a lot more money than the government bond rate even if the money were available, he had another answer. He said that people like Macquarie Bank and other financial engineers, smart financial engineers, would find a way to make big money out of this without assistance from tax payers. Somehow, people who thought that the markets couldn’t be trusted, who need the governments as a silent partner to make projects feasible, would rely on those greedy financial engineers to find solutions for the big gaps, the big practical gaps, in the government’s model.

In the end, the people responsible are the politicians. Wayne Swan was always aware of his inexperience as a treasurer. In opposition he announced that the Rudd Government would involve treasury far more heavily in government policy. It seemed a very good idea at the time as Treasury felt it had been left out by the Howard Government. We used to jokingly refer to Treasury as Wayne Swan’s “security blanket”. The trouble was that Wayne Swan went too far and seemed to believe that most ideas from Treasury could be simply delivered without being put through the real-world filter. This includes the use of dodgy statistics to prove Treasury’s theories, thus undermining its independence. All of which is rather concerning. Miners may be able to pay a moderate amount more tax and it may well be the case that in principle a profit-based tax makes sense. But that argument has been degraded by the heavy-handed way the government has tried to bludgeon its way into political advantage.

Kevin Rudd is better than Swan at telling different audiences different things according to what seems to suit at the time. He has been able to charm people a little bit more even though people are wary and dismissive. It is hard to get away with that level of inconsistency when you’re prime minister; you eventually trip yourself up and voters start adding up the contradictions. Yet it was Rudd and Swan who had an alliance with Ken Henry. They thought they had all the answers. But this high handedness has led to the questions that voters are asking. In combination with other things that have gone wrong, the most dangerous question of all is whether this government is competent when running the economy? Once that takes hold, it is very difficult for the government. That is why you are seeing now.

I will finish with one of the more chilling comments that a Labor Party person said to me. Not probably the most politically correct thing to say. It went: “We say that Tony Abbott has all sorts of problems with his economic credibility, his understanding of business, and that is a very salient and valid criticism. Our problem is that we’re looking as if we have a prime minister, a treasurer and a deputy prime minister with the same problem.” And that of course is a broader problem for the whole country.