Private interests can misrepresent and campaign against a reform programme in ways that make choices in the public interest difficult and unlikely. They have powerful incentives to obscure the real effects of interventions. By contrast, those seeking greater economic efficiency and equity have an interest in independent analysis, transparency and public education.
Similarly, as noted in Chapter 3, private interests have a large advantage in the concentration of benefits from particular interventions on a small number of recipients. These beneficiaries know exactly who they are, and are prepared to invest a proportion of the gains from favourable interventions to secure their continuance. By contrast, those seeking to advance the public interest are handicapped by the free rider constraints on collective action. None of the many diffuse beneficiaries of any particular act of good policy will have a strong interest in seeking out reliable and comprehensive information on the effects of that policy and persuading others of its merit.
That explains why good policy for economic efficiency and equity is the exception rather than the rule. It explains Australia’s chronic economic underperformance through most of its history, and the quick restoration after the Reform Era of approaches that are unlikely to sustain prosperity.
Political leaders and parties can associate themselves with public interest objectives, or align themselves with private interests. In the latter case, they can catch a ride on others’ marketing of a deceitful version of the common good. These are ancient verities of political systems; the ride is simply faster with sophisticated modern channels of influence.
In the early twenty-first century we have seen a reversion to the old behaviour of interest groups from before the Reform Era, but we have also seen new ways of participating in the political process. One new development is the rise of partisan political campaigns from industry across a wide range of issues, whenever private interests are crossed by proposals for policy change. These have been conducted without the more or less sophisticated appeal to the public interest that would have been necessary for a hearing in the Reform Era. This adds to the difficulty of Australia’s adjustment to the end of the China boom.
A NEW APPROACH TO GAINING INFLUENCE
The first large-scale campaign in the new style was that by the union movement against the Howard government’s WorkChoices industrial relations policy. The trade unions spent about $30 million on the campaign. This intervention is credited with having been hugely influential in the 2007 general election that led to the formation of the Rudd Labor government. The most elaborate analysis of the campaign suggests it had a significant effect in twenty-five marginal seats that were the focus of intensive effort, although the Rudd government would have been elected without it. The reputation of its success has deterred the Coalition from considering any substantial change to industrial relations since that time.
This was no ordinary issue. It raised anxiety about working conditions in a large part of the population. It was therefore likely to be fertile ground for action by an effective opposition.
For business, the campaign against the Resources Super Profits Tax (RSPT) has become the model for action. This new tax on mining profits was one of many changes recommended by the Henry Taxation Review. The government announced mid-afternoon on Sunday, 2 May 2010 that this and a small number of other recommendations would be implemented.
The Henry Review’s RSPT was put forward as a tax on mineral rent. If structured correctly, a rent tax can collect substantial revenue without deterring the development of new mines or the expansion of established ones. However, there were a number of problems with the review and its RSPT recommendations that made it especially vulnerable to attack.
While the secretary for the Treasury was eminently qualified to lead such work, he was also to advise the government on its policy response to the review’s recommendations. This did not give the review or its response the necessary independence from government, which inevitably affected assessment of the recommendations.
While resource rent taxation was familiar to relevant parts of Australian business and independent analysts through the Petroleum Resource Rent Tax (PRRT), which had operated for over a quarter of a century, the RSPT was new to citizens and firms in Australia, and to the industry everywhere. This form of taxation was only ever understood by a few of the academic specialists and one or two media commentators who were called upon to play a role in the public discussion. It was not understood by the ministers who had to explain it to the electorate. Its unfamiliarity made it unsuitable for immediate implementation; at best, it required lengthy public discussion, analysis and assessment.
Unfamiliarity was not its only problem. If the RSPT had been tabled for public discussion with the Report of the Henry Review and subjected to critical analysis, there would have been widespread agreement on the need for substantial modification – in my view, in the direction of the PRRT. Successful implementation of the RSPT also required intensive communication and an eventual agreement with the states. There was no intensive communication, let alone agreement.
When the commonwealth budget for 2010–11 was unveiled later in May, it included revenue from the RSPT in the estimates, leaving no easy room for discussion with the industry. While it is unusual and bad practice to negotiate taxation parameters with affected taxpayers, it is normal and good practice to consult on how a new tax would work, with a view to incorporating knowledge uncovered during consultations in government’s final decisions.
The mining industry, led by the two largest companies, reacted with unprecedented fury to the announcement of the new tax. The Minerals Council of Australia spent $17 million, and individual mining companies and a smaller association $5 million, on a six-week advertising campaign against the tax and the government. The campaign was stopped after factional Labor leaders secured the replacement of Kevin Rudd by Julia Gillard and the new government entered into negotiations with the three largest mining companies on the replacement of the RSPT.
Things got worse after the change of prime minister. Gillard supervised the negotiation of a hastily constructed alternative based on the structure of the PRRT. This new tax, the MRRT, was confined to iron ore, coal and petroleum.
Its initial flaws were compounded when a former chairman of BHP Billiton with apparent conflicts of interest was appointed to chair a committee to recommend on transitional arrangements. A commonwealth minister was a member of this committee – an anomalous position for someone who would be required to join the Cabinet to consider its recommendations.
The general form of the MRRT that emerged from this complex process was sound. However, it contained several problematic features that were never publicly explained or discussed before legislation. The transitional arrangements effectively exempted income from profitable established mines for many years, even if they had already recouped historical investments with high rates of return and continued to be highly profitable. Without good reason, the tax covered only part of the mining and petroleum industries. The rates of return allowed on investment were higher and the rates of taxation lower than for the established PRRT, which had operated with general comfort for a quarter of a century. And the relationship between the new commonwealth tax and state royalties was bound to be a source of economic distortion and instability.
The government accepted advice that the revised tax would still generate large amounts of revenue. These expectations were written into the budget. The eventual failure of the tax to yield the revenue contributed to the corrosion of the government’s reputation for fiscal competence.
And yet – despite the RSPT coming out of an inappropriate process, being badly designed and appallingly implemented, and being subject to huge activist opposition from the mining industry – there was considerable support in the electorate for the original proposal.
Several polling groups measured attitudes to the RSPT through the six weeks of conflict. The questions
asked were not identical, but a general picture emerges of slightly larger support than opposition on the tax’s announcement. The proportion of supporters fell over the six weeks, to end up a bit smaller than opponents at the end. The responses were different in the one poll, late in the contest, on 23 May, in which respondents were told that the revenue was to be used for reducing company tax, assisting small business and increasing superannuation; supporters at 43 per cent exceeded the 36 per cent against. The proportion opposed was fairly stable over the six weeks: the shift was from support to uncommitted.
The more important result was that the standing of the government rose steadily through the six weeks. We have Newspoll results for the weekend of the announcement (with interviews too early to be influenced by the RSPT announcement) and at two-week intervals. The first, taken on 1–2 May, was the worst Newspoll ever for the government under Kevin Rudd, with the slump immediately following his decision to abandon an attempt to legislate for an ETS – 49:51 against. Two weeks later, the poll had evened up to 50:50. With the battle continuing, the next poll was 51:49 in the government’s favour. The final poll, taken with Rudd as prime minister but released on the day of his replacement, was 52:48 in favour of the government. Every poll has a margin of error and there are many other issues in play, but this series of observations demonstrates at least that the campaign by the mining companies did not damage the electoral standing of the government over this period.
Contrary to the conventional wisdom on the electoral politics of the RSPT, Rudd and the government won the contest in the electorate. The government failed on the issue because the process of policy development led to an unsatisfactory choice of taxation instrument, and then the leading figures in the Labor Party lost their nerve, failed to think through the consequences of toppling a prime minister under the circumstances of mid-2010, and let other agendas get in the way of the implementation of a contested policy. It was a failure within the Labor Party and the government, rather than a case of the power of mining companies exceeding that of a democratically elected government.
The episode is remembered as a caution to governments proposing policy that is opposed by large corporations. A clear-headed assessment suggests a different conclusion: that under the right conditions, a government acting in the public interest has considerable autonomy in standing up to the most powerful private interests even when they have committed large resources to the exercise of political influence. The right conditions include a wide public understanding of the issues, and coherence in the decision-making processes of the government.
Who was to blame for the fiasco? Companies can be expected to promote their own interests, whether or not these coincide with the public interest. Governments can be expected to defend the public interest. It is a pity for our democracy and for policy based on the public interest that this new approach by private interests to influencing policy entered Australia, but the failure to respond to it firmly in the public interest was unambiguously a failure of government. The Labor government did not hold firm in defence of the public interest.
The RSPT outcome is discussed internationally as a case of the subversion of democratic processes by corporate power. The change of prime minister and abandonment of the RSPT have been raised with me by wise and thoughtful Chinese who hope for a democratic future for their country. They have interpreted the dispute as a case of corporations having the power to overthrow a democratically elected prime minister within established Western models of democracy. A democracy in which that can happen, they say, is unattractive.
Chinese with other political inclinations have taken comfort from the power of money (of which they have plenty) to influence policy in a Western democracy. I have tried to explain to both groups that the affair was the failure of a government and not a failure of the democratic system.
There is an inclination for Chinese observers to accept what they are told by Western businesspeople about the power of money in our democracy. One top Chinese business leader with mining interests in Australia told me in 2011 that a leading Australian mining figure had advised him that there was no need to worry about the mining and carbon taxes: the miner had paid $2 million to Australian political parties to ensure that these taxes would be abolished after the next election.
Chinese observers who hoped well for democracy, as well as those who took comfort from the power of money in Australian politics, would both have taken a close interest in the 2013 election, when an Australian mining magnate decided to do away with the political middleman and secure his own representation in the Australian Parliament. The Palmer United Party went on to win three Senate seats. Clive Palmer, to his credit, has recognised the potential for conflict of interest. How this conflict is managed is a crucial matter for the reality and the perception of the integrity of Australian democracy.
For all its flaws, the MRRT that was legislated through this fiasco is now yielding some revenue. It will yield much more in any future years of exceptionally high commodity prices, in all the years that follow a large and durable currency depreciation, and after the exhaustion of the ‘market value’ transitional deductions in the 2020s. Removing the MRRT will have virtually no effect on mining companies’ decisions regarding new investments, so it will not increase economic growth. The only practical economic effect of removing the MRRT will be to make the long-term budget challenge harder.
The RSPT conflict has inspired political campaigns to change policy by a large number of interest groups. It was followed by campaigns or threats of campaigns along similar lines by the gambling industry to block reform to restrict access to people with gambling problems; by the automotive-leasing industry to block reform of the fringe-benefits tax; by the pharmaceutical retailers to block reform of prescription drug supply; and by the tobacco industry to block plain packaging. The Opposition promised to give the corporate lobbyists the outcome that they sought on most issues. This helped to entrench the new political culture for the time being. It will be a rod for the back of the government, the breaking of which will require strong leadership from the prime minister, with support from the independent centre of the polity.
MINING-TAX POLITICS WAS ONCE DIFFERENT
To understand the extent of the change in political culture involved in the campaign against the RSPT, it is instructive to go back to the end of the Japan resources boom: the lift in minerals and energy prices of the early 1970s following the first oil shock of 1973. Global coal and oil prices rose several-fold in 1973 and 1974.
Australia’s large coal exports, then mainly metallurgical coal from Queensland, were immediately subject to greatly increased rail freights by the monopoly Queensland railways, and an export tax by the commonwealth government. Australian crude oil, then mainly from Bass Strait, was entirely sold at fixed prices into the domestic market under a scheme established by the Menzies government in 1965 and modified by the Gorton government in 1970. The Fraser government allowed prices to rise to international levels in 1976, but imposed a crude-oil levy that absorbed for the commonwealth government virtually all of the increase in revenue from the higher price (amounting to 71 per cent of gross sales revenue in 2012–13, in addition to a royalty of 12.5 per cent still applying).
By the Fraser government’s last full financial year in office, the levy (ignoring the old royalty) contributed about 1.9 per cent of GDP to revenue. If the same marginal rate of taxation had been applied to the increased revenue from higher coal and iron ore prices from established iron ore and coal mines in the China resources boom from 2003, these two parts of the mining industry on a conservative estimate would have contributed an additional $21 billion in revenue in 2012–13 after taking into account reduced corporate income-tax receipts. The 2012–13 budget would have seen a surplus rather than a deficit of $19 billion.
I do not draw on this history to commend the actions of Australian governments in the 1970s. Far from it. I was the most persistent critic of the W
hitlam and Fraser governments’ approaches to taxing mineral rents. A series of my papers with Anthony Clunies Ross was influential in the eventual replacement of the crude-oil levy by the PRRT. The Hawke government removed the crude-oil allocation system on my advice during the prime minister’s first term. Free export prices and the PRRT generated large amounts of revenue – less than the crude-oil levy in the short term, but more in the long term due to the more efficient development of the petroleum sector.
I draw on this history only to demonstrate the huge change in political culture. The main company managing relations with government in both oil and coal was BHP. Then a mainly Australian-owned and Australian-managed company, it ran relations with government for its foreign 50:50 joint venture partner in Bass Strait. BHP and the smaller Australian companies affected by the policy changes grumbled but accepted the decisions of the democratically elected government. BHP’s partners did not grumble publicly. The changes made by the government were seen as the sovereign right of governments and not as sovereign risk.
The PRRT is now seen as having made a substantial contribution to revenue, with minimal distortion of production and distribution decisions. Nevertheless, it was greeted critically by the Coalition Opposition of the day. ‘Nothing could better illustrate the counter-productive nature of the Hawke government’s energy policies,’ said the shadow treasurer, John Howard. ‘The Hawke government’s RRT will effectively destroy the incentive for offshore exploration …’
As it turned out, offshore oil and gas exploration, development and production all expanded enormously. Prime Minister John Howard thought that the PRRT worked just fine – fine enough to leave it in place and generating substantial revenue for eleven years. If the new Abbott government were to retain the MRRT, it may be disappointed with the revenue yield for quite a while, but would find that the tax generated worthwhile amounts of revenue later on.
Dog Days: Australia After the Boom (Redback) Page 18