For most of the past decade I’ve defended Australia’s mining
companies and their boom against unreasonable criticism. So I could hardly be
said to be anti-mining. But one of my failings is that don’t get any fun out of
telling people what they’d like to hear. So when I was asked to speak at the
federal government’s annual conference on resources and energy last
month I decided to tell the miners a few home truths. This is a shortened
version of what I said.
With the change of government I'm sure you're a lot happier about the
prospects for the economy and its management, and a lot more confident
of a sympathetic hearing from the new government. I wouldn't be so sure.
I
suspect the mining industry's lobbying success is reaching its zenith
as we speak. It won't surprise me if, looking back on the life of the
Abbott government, you come to realise the big gains the industry made
actually occurred under the Labor government. They occurred no thanks to
Labor, and all thanks to the Coalition, but they occurred in reaction
to the policies of Labor as part of Tony Abbott's successful four-year
campaign to fight his way back into office.
Why did Abbott
immediately oppose the mining tax and promise to repeal it? Because he
genuinely believed it would wreck the mining industry and do damage to
the wider economy? I doubt it.
He did it primarily because he saw
opposing the tax as a popular cause and was hoping for a lot of monetary
support from the big miners in the 2010 election.
Why did Abbott
set his face against the carbon pricing scheme? Because it was the price
of getting the backing within the party that allowed him to wrest the
Liberal leadership from Malcolm Turnbull and because he could see what a
popular cause it would be to oppose this "great big new tax on
everything".
Now, I have no doubt that keeping his promises to get
rid of the mining tax and the carbon tax will be among his priorities.
But my point is this: having delivered so handsomely for the mining
industry, I doubt if he'll feel in any way indebted to the miners.
Indeed, he may well feel he's the one that's owed. Certainly, he'll feel the miners have had enough favours to be going on with.
And
it won't surprise me if that's the attitude other industries take: that
the miners have had their turn and it's time to give other industries a
go.
Does this analysis seem cynical? Sorry, it's just being
brutally realistic. We all pursue our self-interest, but we all cloak
our self-interest in arguments about how this would be in the best
interest of the economy. All I'm doing is stripping away the bulldust.
Most
people in business are hoping that with a more enlightened government
in power with a big majority in the lower house and a workable Senate
after July, we'll see some major economic reform, if not in Abbott's
first term then certainly in his second. I think this is an idle hope.
In
a prophetic speech he delivered in May - and which he's in the process
of expanding into a short book - Professor Ross Garnaut argued that our
political culture has changed since the reform era of 1983 to 2000, in
ways that make it much more difficult to pursue policy reform in the
broad public interest.
"If we are to succeed, the political
culture has to change again," he said. Policy change in the public
interest seemed to have become more difficult over time as interest
groups had become increasingly active and sophisticated in bringing
financial weight to account in influencing policy decisions.
"Interest groups have come to feel less inhibition about investment in politics in pursuit of private interests.
"For
a long time, these past dozen years, it has been rare for private
interests of any kind to be asked to accept private losses in the
interests of improved national economic performance.
"When asked,
the response has been ferocious partisan reaction rather than
contributions to reasoned discussion of the public interest in change
and in the status quo," Garnaut said.
I would remind you that,
though John Howard's introduction of the GST is a notable exception,
many of the reforms of the Hawke-Keating era were achieved with
bipartisan support - something that's unthinkable today.
Much of
that reform, particularly in taxation, involved packages of measures in
which particular interest groups suffered some losses, offset by other
gains. As Garnaut argues, and I'm about to demonstrate, this kind of
co-operative give-and-take between interest groups willing to accept
reforms in the wider public good isn't conceivable today.
My way
of making Garnaut's point is that since the reform era of the 1980s and
'90s, we've regressed to a culture of rent-seeking. You can see this at
the level of the political parties and at the level of the industry
lobbies.
When Howard had the courage to propose introducing a GST,
Labor saw its chance to regain office by running a populist scare
campaign against it, and came within a whisker of winning the 1998
election. At the time it professed to be righteously opposed to such a
regressive tax, but when it finally regained power seven years later,
the idea of doing something about that supposedly abhorrent regressivity
never crossed its mind.
When, in turn, the Rudd government
attempted the risky reforms of installing the "economic instrument" most
economists recommend for responding to climate change, and rebalancing
the tax system by reforming the taxation of mineral deposits and using
the proceeds to reduce taxes elsewhere, Abbott lost little time in
deciding to take advantage of Labor's vulnerability.
Do you really
think the events of the past three years will have no bearing on the
Labor opposition's attitude to any controversial reforms Abbott might
propose in the next six years, or that Abbott's foreknowledge of this
attitude will have no bearing on his willingness to propose such
reforms?
The truth is the nation has fought itself to an impasse
on controversial reform - of the labour market as well as taxation -
and, among the industry lobbies, the miners have played a more
destructive role than the rest.
Now, you can respond that the
miners did no more than what you'd expect them to do: oppose taxes they
perceived to be contrary to their industry's interests. But this is
making my point: the reason the outlook for reform is now so bleak isn't
solely because the two sides of politics have regressed to
short-sighted, self-interested advantage seeking, it's also because the
industry lobby groups have done the same thing.
There's nothing
new about industry lobbying but in the past dozen years it's become far
more blatantly self-interested and far more willing to devote large sums
to advertising campaigns to oppose whatever government reforms an
industry sees as contrary to its interests. What hasn't yet occurred to
many business people - but you can be sure is well understood by the
politicians and their advisers - is that when industries lobby
governments for favours, or in opposition to new imposts, the various
industries are in competition.
It's easy to imagine the
government's coffers are a bottomless pit but, in fact, there's only so
much rent to go around. As an economist would say, all concessions have
an opportunity cost. It's easy to believe all industries could pay less
tax if the pollies would only make households pay more tax, but I
wouldn't hold my breath waiting for it to happen. I doubt either side of
politics would see that as consistent with their own self-interest.
The
truth is, when one industry gets in for a big cut, there's less left in
the pot for the others. That industries don't understand this simple
point about opportunity cost - don't realise they're in competition with
each other - is easily demonstrated by the demise of Labor's mining tax
package.
Think about the original package: the big three miners
were going to pay more tax on their resource rents, but most of the
proceeds were going to be distributed to other industries.
In
particular, all companies (including miners, big and small) were getting
their company tax rate cut by 2 percentage points, small miners were
getting a resource exploration rebate, small business was getting
instant write-off of most assets, the banks were getting more
concessional taxation of depositors' interest income, and the financial
services industry was getting its dream of having compulsory super
contributions jacked up from 9 per cent to 12 per cent, a one-third
increase in contributions.
So three big miners had a lot to lose,
but the rest of industry had a lot to gain. So what was the rest of
industry's attitude to the resource super profits tax? Didn't like the
sound of it.
And what did they do when the miners sought to scuttle the new tax? Precisely nothing.
What happened then? The
exploration rebate was to first thing to disappear and, in several
stages under Labor, the cut in the company tax rate got whipped off the
table.
Now, with Abbott's plan to abolish the cut-down mining tax,
the small business concessions are being withdrawn and the phase-up of
compulsory super has been deferred for two years.
With all the
pressure on the Abbott government's budget, and the super industry
extracting a promise from Abbott not to make any further savings on the
concessional taxation of super, I'm prepared to bet the two-year
deferment will become permanent.
Thus did the rest of business
allow the miners to screw them over. And thus did the miners destroy
faith in one of the techniques tax reformers believed made major tax
reform possible: put together a large package with a mixture of wins and
losses and the various industry lobbies keep each other on board in the
wider interest.
But it doesn't stop there. When the miners and
the rest of business dream of further tax reform under the Abbott
government what do they have in mind? Mainly, a big cut in the company
tax rate. Do you really see the Abbott government daring to fund such a cut by increasing the GST?
Had
the minerals resource rent tax survived and got past its accelerated
depreciation phase, the fact that the most highly profitable part of the
corporate sector (along with the banks) was paying a lot more tax on
its profits would have greatly strengthened the argument for a general
cut in the company tax rate. This is particularly so because mining is
so heavily foreign-owned. So the absence of the resource rent tax makes a
cut in the company tax rate a lot less likely.
One way a cut in
the rate could still be afforded is if it was covered by a broadening of
the base by the removal of sectional concessions. But the bitter
experience of the demise of the mining tax package makes it less likely
any government would risk proposing such a compromise.
We can
continue going down the road of ever-more blatantly self-interested
behaviour by political parties on the one hand and industry lobby groups
on the other, but while we do so it's idle to dream of major reform.
What we can do - as the miners have shown - is veto any reform we don't fancy.