For a party whose hopes of re-election rest extensively on its claimed solid fiscal record, federal Labor's economic credibility took a significant hit this week. The government was forced, finally, to concede its controversial minerals resource rent tax will raise only a fraction of the $2 billion it was forecast to generate this financial year, and that softer iron ore prices will continue to limit its revenue-raising capacity in the short term.
This immediately raised questions about how measures supposedly being financed by the MRRT (including the phased increase in compulsory superannuation contributions from 9 per cent to 12 per cent of wages) will now be funded. Then came the revelation Treasury officials had been excluded from the negotiations between the government (represented by Julia Gillard, Treasurer Wayne Swan and Resources Minister Martin Ferguson) and the mining industry (represented by the chief executives of Australia's three biggest miners) over the tax's final design. Their exclusion, and the fact that the deal was discussed and finalised in just one week, might explain why a drafting error ensuring miners would be refunded ''all state and territory royalties'' was overlooked.
Then there was the release of modelling indicating that carbon prices will drop sharply in coming years, resulting in a $4 billion revenue hole in the government's budget predictions. These embarrassments follow Mr Swan's admission (in the week before Christmas) that Labor was abandoning its long-held commitment to a budget surplus next financial year. All have cast considerable doubt on Labor's claims to have a sound grasp of economics.
The government could not have foreseen that iron ore prices would soften at the time its MRRT came into effect - or that the carbon price might drop, rather than rise after the switch was made from a fixed to a floating price mechanism in 2015 - so it cannot be held entirely responsible for the looming revenue shortfalls. It can, however, be accused of having implemented the mining tax in an appallingly craven (and slapdash) manner.
Former prime minister Kevin Rudd must bear some of the blame, too. The recommendation for a 40 per cent resources super profits tax (outlined in the 2010 Henry Tax Review) was a reasonable and sensible one. But by presenting his initiative as a fait accompli, and therefore not open to further negotiation, Mr Rudd provoked the mining industry into a ferocious public relations and lobbying campaign aimed at nothing less than torpedoing the tax. It included predictions of a collapse in mining investment and mass lay-offs, and so unnerved was Labor by it that Mr Rudd was forced into relinquishing his leadership within a matter of weeks. An apparently cowed Gillard government then negotiated with the miners to replace the super profits tax with a much weaker 30 per cent minerals resource rent tax applying only to coal and iron ore - with, as we have now discovered, considerable speed and carelessness. In addition, the agreement contained an ''extraction allowance'' that effectively raised the level of profits at which tax would be payable. Soon after the deal was signed, Western Australia raised its iron ore royalty rate from 5.6 per cent to 7.5 per cent, safe in the knowledge that there would be no adverse reactions from the miners. Others have followed suit. Mr Swan's so-far-unrealised threat to withhold Commonwealth grants from offending states has only underlined the government's lack of resolve on this matter.
With hindsight, the best time to have implemented a super profits tax would have been when the mining boom was at its peak, from 1995 to 2005. There was a lively debate at that time as to whether Australia was getting full value from its mining resources and whether indeed the windfall tax revenues were being put to best use, and the Howard government's failure to consider these matters more fully reflects no great credit on the Coalition.
For all the doubts that have arisen about Labor's economic competence as a result of this episode, the Opposition cannot claim to be greatly superior. Its pledge not to have any form of resources rent tax is compelling evidence of an aversion to considering any kind of taxation reform.
The need to reform the MRRT and clean up the states' royalty scheme is manifest. With no party prepared to do that, however, taxpayers can only rue the government's decision to legislate with such haste. The government may shortly have plenty of leisure time in which to repent.
