What business needs to learn about politics

The way big business sees it, economic reform has ground to a halt because the politicians on both sides have lost the political will to make the tough decisions. But I think big business must share the blame for the stalemate we've reached.


Business leaders have lost confidence in the Gillard government and, having concluded its days are numbered, are uncharacteristically willing to attack it in public. In private, though, most would doubt an Abbott government would be any more willing to grasp the nettle.

Consider the GST. Despite all the good sense Nick Greiner was talking last week about the need to fix it, both sides refuse even to discuss the topic. It was specifically excluded in the terms of reference for Ken Henry's "root and branch" review of the tax system (which didn't stop him proposing a similar tax with a different name).

It's not hard to see what the problem is. Each side is afraid that, if it showed the slightest interest in considering the topic, the other side will use this as a pretext to launch a scare campaign.

Or, consider the mining tax. Although it's not true the tax raised no revenue in its first quarter, it is true it raised less than expected, mainly because of the fall in commodity prices.

But prices have recovered from their lows in the first two months of the quarter. As well, the nature of the quarterly instalment process means collections are likely to pick up in later quarters.

Even so, it is true that the compromise tax Julia Gillard negotiated with the big three mining companies was both badly designed and too generous to the miners.

Why did she give in to them? Because the opposition had sided with the miners in opposing the original tax and, in their efforts to destroy the Rudd government, the big miners would have given the opposition huge funding in the 2010 election campaign.

One reason the miners were so opposed to the original tax was that the government caught them off guard with a strange tax they didn't understand. This would not have happened had Labor released the Henry report for discussion well before it made up its mind about which recommendations to accept, reject or modify.

So, why didn't it? Because it was so afraid the opposition would run a scare campaign claiming that Labor intended to implement all of Henry's most controversial proposals.

Next, consider company tax. For reasons I can't fathom, big business has its heart set on a cut in the company tax rate. Labor promised a cut of 2 percentage points, but the deal with the miners obliged it to reduce the cut to 1 point.

Then the combined opposition to this from the opposition and the Greens allowed Labor to renege completely. Although all previous cuts to the rate have been funded by the removal of concessions, big business can't agree on which concessions it's prepared to give up.

This has allowed Labor to shelve the idea. And I wouldn't hold my breath waiting for an Abbott government to find the revenue needed to fund a cut.

Finally, consider all the reform the Hawke-Keating government undertook during the 1980s and early '90s: deregulating the financial system, floating the dollar, phasing out import protection, deregulating more industries than you can remember and decentralising wage-fixing.

What do these reforms have in common? They went virtually unchallenged by the Liberal opposition of the day, under the dominant influence of John Howard and John Hewson.

Are you starting to see a pattern? All the reforms that aren't getting up (or, in the case of the mining tax, got badly botched) have become party-political footballs. And almost all the reforms we did get were bipartisan policy - with the GST and the carbon tax as the notable exceptions (although in both these cases the lack of bipartisanship led to inferior policy).

The point is, it's not so much unhappy voters governments fear, it's their political opponents seeking to take advantage of the voters' unhappiness.

What many business people don't understand about politics is the power of oppositions to influence what governments do and don't do. It's rare for governments to make controversial reforms when they know their opponents are waiting to pounce.

The bipartisan support for micro-economic reform lasted throughout the Hawke-Keating government's 13 years, but broke down after Paul Keating's defeat in 1996. Since then, both sides have gone for short-term political advantage at the expense of the nation's longer-term interests.

So, the first lesson big business needs to learn is that it's not enough to pressure the government of the day to show "political will". You must also pressure the opposition to resist the temptation to score cheap political points.

That's particularly the case when it's the opportunism of a Liberal opposition that is discouraging a Labor government from doing what it knows it should.

The second lesson is that big business won't get far until it abandons its code of honour among thieves. That is, when one industry goes into battle with the government to resist a new impost or get itself a special concession, all the other industries keep mum, even though they know the first industry is merely on the make.

Big business looked the other way as the three big miners connived with the opposition to destroy the Rudd government. Its reward was to have its precious cut in company tax snatched away.

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Truth is almost always in the middle

I like Americans. I have American friends, and I remember a trivial incident that endeared me to Americans forever. We were in a funicular going up one of the hills surrounding Lake Como in Italy, at close quarters with a group of Yanks. They were joking and teasing each other in a way that struck my contact-deprived mind as very Australian.

But thanks to a great American institution, the Pew Research Centre, I now realise I think more like a European than an American on one of the central issues of economics and politics.

The centre's study of "American exceptionalism" asked samples of people in the US, Britain, Germany, France and Spain which was more important - being free to pursue your life's goals without interference from the state, or for the state to play an active role in society so as to guarantee that nobody was in need.

In the US, 58 per cent of respondents favoured individual freedom and 35 per cent favoured ensuring nobody was in need. In Europe, it was the other way round, with just 38 per cent of Brits favouring individual freedom and the proportion declining to 30 per cent by the time you got to the Spaniards.

A related question asked people if they agreed that "success in life is pretty much determined by forces outside our control". Only 36 per cent of Americans believed they had little control over their fate, compared with 50 per cent in Spain, 57 per cent in France and 72 per cent in Germany. Britain was the only European country surveyed where fewer than half (41 per cent) shared that view.

The joke of this is, despite the Americans' confident belief anyone can go from log cabin to White House if they try hard enough (the most recent proof positive being Barack Obama), studies show the US to have the lowest degree of social mobility - people actually making it from a poor start to a prosperous finish (or vice versa).

Individualism is very much a Western value (and, by the way, deeply embedded in the economists' conventional model of how economies work). I confess I've got a lot of the individualist in me. I like being free to do things my own way; I don't feel a compelling desire to be the same as other people.

At another level, however, I accept the need for the community to pull together towards common objectives, for us to be led by our elected leaders and for the better-off to be required to assist the less-well-off. I don't resent having the taxman redistribute a fair bit of my income to those less fortunate.

So I can see merit in both sides of the story. And one of the firmest conclusions I've come to about life and the economy is that the truth - and the right place to settle - is almost always to be found not at either extreme, but somewhere in the middle.

Just where in the middle is the hard part. We spend our lives searching it out - the more so because changes in the rest of the world probably cause it to shift over time.

The great temptation is to seek the simplicity and false certainty of either extreme - on this question of the ideal role of the state, libertarianism at one end and socialism at the other.

It's actually all the time I've spent hanging out with economists that's led me to the centre. Economics teaches that life's about optimising not maximising. We almost always face a range of desirable but conflicting, objectives. So all of one and nothing of the others is never the most desirable combination.

Economics is about trade-offs - about finding the particular combination of rival objectives that yields the most satisfaction. So life's about balance - "equilibrium" as economists say. Perhaps the modern term "the sweet spot" puts it better. We're searching for the place that gives us the best of all worlds - at least, the best available.

And yet our history shows us more inclined to swing from one extreme to the other. After World War II, people were dissatisfied with the way the economy was working. Particularly in Europe, they decided the answer was to nationalise all the key industries.

Flash forward to the 1980s of Maggie Thatcher and Ronald Reagan. People are dissatisfied with the way the economy is working so they decide the answer is to privatise all the key industries and deregulate the rest.

In the aftermath of the global financial crisis, the pendulum may be swinging back in favour of regulation.

The sweet spot in the middle is so hard to find. We keep falling for the simplicity and false certainty of extreme solutions.

The truth is the capitalist system does need to be protected from its own excesses, which could bring it - and us - crashing down. We were reminded of this truth in the recent crisis, from which the Europeans and Americans have yet to escape.

But, by the same token, we mustn't go to the opposite extreme of having the state attempt to solve all our problems and leave us imagining any remaining difficulties in our life must be the government's fault.

The truth is the government can't solve all our problems, and the more we abandon primary responsibility for fixing them ourselves, the more dysfunctional society becomes.

More than 70 per cent of Germans believe they have little control over their fate? It's all the fault of The System? They're just as misguided as all those Yanks believing hard work will get them to the top. As ever, the truth is a bit of both.

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Battle over tax leaves Labor with bloody nose

The deal Julia Gillard has done on the mining tax is bad for her government's reputation, bad for democracy and bad for the future of economic reform, but not too bad for the economy.

The immediate reaction of most parties will be relief. What was seen as a great threat has gone away.

The big miners will be quietly congratulating themselves on the extent of their victory, but leaving it to their friendly business commentators to do the crowing for them.

Concessions extracted from the government because the big mining companies were holding a gun to its head will be interpreted as proof that all the miners' dubious arguments against the resources super profits tax were valid.

But the initial emotional reaction to the deal is one thing, the longer-term consequences are another.

Although Gillard, being a new prime minister, will be given a lot of slack by the electorate, the Labor government's backdown on the mining tax, coming on top of its retreat on the emissions trading scheme, will entrench its reputation for weakness and lack of conviction, and further embolden vested interests to actively resist legislation they don't like.

Labor will be looking for people to blame, but it should consider its own part in this political disaster. Its decision to adopt such a controversial reform so close to an election was a basic political miscalculation.

Its belief that, simply by naming the tax a "super profits" tax, it could harness all the public's envious resentment of the rich mining companies, which would be sufficient to outweigh all the propaganda the miners would put up, was another bad call.

This government has shown an inability to set priorities for itself, tried to do too much, and grossly underestimated the degree of ground-preparing, consulting and explaining needed to ensure a controversial reform makes it from announcement to reality.

Professor Ross Garnaut said early in this war that it would be a test of whether difficult economic reform remained possible in Australia, or whether powerful interest groups now had too much sway over the political process.

By that test we haven't done well, even if a significant element of reform remains in the compromise forced on the government. It's now clear to all that governments daring to take on the mighty mining industry can expect to lose.

The big miners have won their fight against the emissions trading scheme, and now they'll be seen as achieving major concessions in the attempt to make them share with the owners of the resources a larger proportion of the windfall gains from the resources boom.

These guys are giant killers. They saved themselves $1.5 billion over the first two years - and probably a lot more in later years - for the price of an advertising campaign estimated to have cost just $7 million.

They prove that if you're big enough, rich enough and aggressive enough you can push around the elected government of Australia.

This Labor government has always been afraid of big business and now its drubbing at the hands of three big companies will deepen that fear. What do you reckon are the chances of a re-elected Labor government returning to the Henry report for further ideas on tax reform?

I fear this is the end for controversial micro-economic reform from Labor. And it's hard to see the cause being taken up by a future Liberal government. Don't forget the major part the Abbott opposition's unprincipled opportunism played in this affair and in the abandonment of the emissions trading scheme before it.

The deal involves changing the (dumb) name of the resources super profits tax to the minerals resource rent tax, turning it into a more generous version of the existing petroleum resource rent tax and extending the coverage of the petroleum tax.

That's not the end of the world. The miners had been expecting something similar to petroleum tax and, had that been what the government decided to introduce, it would have been greeted by economists as a big improvement in the efficiency of resource taxation.

In theory, the originally proposed tax was more economically efficient than the petroleum tax - that is, it would have done less to distort miners' choices about what projects to undertake. But some of the miners' criticisms of it - namely, that bankers would discount for purposes of collateral the value of the government's guarantee to cover 40 per cent of project losses - were genuine.

The main difference in changing the original tax to be more like the petroleum tax is to drop the guarantee to pick up 40 per cent of losses, in return for the cut-in point for the application of the rent tax being raised from the long-term bond rate to the long-term bond rate plus 7 percentage points.

This is just a change in the way the tax allows for "risk" in the universally accepted proposition that economic rent is what projects earn in excess of their risk-adjusted rate of return (the long-term bond rate being taken as the risk-free rate of return). Don't forget that those minerals that remain covered by the new tax - iron ore and coal - will still have the new tax effectively take the place of the states' volume- or price-based (but not profit-based) royalty charges. This feature does much to improve efficiency.

What's hard to understand about the deal is that so many changes could be made at such a small net loss of revenue from the new tax: $1.5 billion over the first two years. Three possible explanations come to mind. First, the original costings had a lot of leeway built into them in anticipation of some concessions having to be granted.

Second, the ultimate cost of the concessions won't be felt until after the first two years of the tax (the estimates for which we've never been shown).

Third, the exclusion of many other minerals from the tax may involve a net saving to revenue because those firms would have gained from not having to pay state royalties while paying little or no resource rent tax. If so, the small miners have only themselves to blame for throwing in their lot with the big boys and then being dudded.

And the same goes for all those businesses now facing a cut in company tax of only 1 percentage point rather than 2 points because they stood back while their big mining mates did over the government at their expense.

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