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Miserable week for the resources rent tax

It's a rare thing for the public service to shaft their political masters as conclusively as Treasury did over the mineral resources rent tax.

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It’s been a miserable week for the mineral resources rent tax and all who have ever had anything remotely to do with it – including the Liberal Party.

Reversing the aphorism, in this case failure has many fathers - and a mother as well. The “success”, such as it is, appears an orphan as BHP, Rio and Xstrata have no desire to boast that they diddled a deficient government and nation.

It’s a relatively rare thing for the public service to shaft their political masters as conclusively as Treasury did this week over the MRRT. Peter Martin’s scoop for Fairfax Media laid bare just how naïve and/or desperate were Julia Gillard, Wayne Swan and Martin Ferguson in letting Australia’s big miners pull a swifty on them, negotiating or dictating a shadow of a resources rent tax. The Treasury officials who might have had some idea of how a tax could work simply weren’t in the room. Gillard’s haste was indecent.

With the tax now raising spare change, the Liberal Party has been like a dog with two tails – but that’s one of its problems. Shadow assistant treasurer Mathias Cormann wants to blast Wayne Swan over his dud tax, but Tony Abbott has claimed it would destroy the mining industry. They can only wag one.  

The simple economic reality is that it is perfectly reasonable and desirable for Australia to have a healthy resources rent tax. The problem is that the Rudd/Swan effort wasn’t healthy and neither is the current BHP/Rio/Xstrata model. Furthermore, the timing is less than ideal.

The right time to have introduced one was back when the big-spending Howard and Costello team was rolling in the commodities boom windfall, when the existing depreciated iron ore and coal mines turned into pure gold, caught by surprise by the surge in Chinese demand. (Yes, big spending – as Stephen Koukoulas in Crikey and the IMF have most recently explained.)

But strong fiscal policy was beyond those final two lazy Howard/Costello terms. Yes, there was a surplus, but it was too small, like Costello’s political ambition. It was a flat one per cent and thus provided no fiscal drag, forcing the Reserve Bank to boost interest rates. Everyone has forgotten the 9.6 per cent variable home loan rate and that the GFC effectively saved Australia from an RBA-induced recession.

For all the rosy glow of nostalgia, fiscal policy in the last two Howard/Costello terms was second rate. It could have been worse – it could have been third rate – but chanting about a surplus doesn’t make up for the great opportunities lost.

Rudd/Swan didn’t get it either, their 2007 election platform being “me too, and a couple of dollars more”.

And when the Henry Review did put a resource rent tax on the agenda, both sides of politics blew it, although Labor’s biggest mistake isn’t getting much of a run. I’ll come to that.

First, there was the spectacle of Tony Abbott on the bandwagon, just about literally, with the local mining billionaires, pledging not to have any form of resources rent tax and never mind the sound economics. It was Abbott putting his political interests first and those of the nation not getting a look in.

A responsible opposition, one that reversed those priorities, could have engaged in a process of debate and compromise to fix the government’s mistakes, resulting in a reasonable tax replacing the states’ royalties schemes. Instead, the game was left to BHP, Rio and Xstrata to look after their own interests.

No, the Liberal Party has nothing to be proud of in this failure of policy and opportunity. That dulls the credibility of their genuine avenue for criticising the government: Labor was off the planet in planning to use MRRT income for recurrent expenditure items.

That dipsy idea of using the MRRT as a source of handouts for all betrays policy weakness as bad as Abbott’s – or an even more fundamental failure of intelligence.

Any politician vowing to completely scrap the mineral resources rent tax has little economic credibility, but neither does any politician who thinks such windfall income can be pledged to cover recurrent costs. No-one has come out of this with integrity intact.

Michael Pascoe is a BusinessDay contributing editor.