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Swan opts to fight states, not the miners

Wayne Swan.This time last year, Wayne Swan had spent his holidays reading a top-secret copy of the Henry review, which urged a 40 per cent tax on the mining industry.
Nanjing Night Net

A year on, with one prime minister removed after taking on the miners, the Treasurer’s holiday reading was a far cry from Dr Henry’s tome.

Shortly before Christmas, the former BHP chairman Don Argus handed Swan a report outlining the much watered-down resource rent tax, which has been welcomed by the big miners.

But although he now has much of the industry on side, Swan’s quest to extract more tax from the mining industry is far from over.

After what he admits was a ”bruising” encounter with mining heavyweights in 2010, Swan has effectively swapped a fight with the miners for a stoush with the states.

He is now pleading with Queensland and Western Australia to cap future mining royalties to keep the industry competitive – and the states are having none of it.

Swan’s decision to take on the states raises questions about just how powerful the mining heavyweights have become, with the industry expected to resume hostilities if the government cannot get the states on side.

Making matters more complex, Swan’s showdown with the states comes amid growing evidence Australia should be saving more of the proceeds from the once-in-a-century resources bonanza.

In the turbulent weeks after Julia Gillard replaced Kevin Rudd, quelling the mining industry’s anger was a top priority in Canberra.

She largely achieved this in early July, signing a breakthrough agreement with the big three – BHP Billiton, Rio Tinto and Xstrata – to soften the tax considerably.

Rather than the 40 per cent tax proposed by Henry, it was agreed miners would pay effective tax rates of 22.5 per cent and enjoy generous deductions. Miners called off their anti-government ad campaign, and restarted work on shelved projects worth billions to the economy.

But although Gillard’s deal with the miners was hailed as a smart political move at the time, it now looks like a temporary solution.

In the secret July negotiations, the boss of BHP, Marius Kloppers, insisted that all state royalties – including future increases – would be refunded by the federal government.

Canberra later hinted it might not credit all future royalties because this would amount to writing states a blank cheque, but Argus’s report affirmed that all future royalties should be refunded.

Swan is widely expected to adopt this recommendation, and has already called on states to promise they won’t increase royalties.

However, the request has been met with vocal opposition from the premiers of Queensland and Western Australia, setting the scene for heated negotiations this year.

The floods – expected to slash Queensland’s royalty revenue – add another layer of complexity. Nevertheless, Swan has elected to fight the states rather than risk provoking the miners. His willingness to do so raises questions about just how powerful the mining industry has become.

The opposition’s spokesman on mining, Ian Macfarlane, says it is now clear the government rushed to sign a deal without fully understanding the consequences. While he opposes the tax in principle, Macfarlane also recognises the power the Big Three held over government.

”I suspect that the government has got itself so far in that they will have to bow down to the mining companies. They got skinned and that’s a fact,” he says.

”The mining companies have achieved the effective abolition of state royalties.” Macfarlane doesn’t blame the miners for this – instead pointing the finger at Canberra’s failure to consult with the industry and states before it announced the original 40 per cent tax.

On the government’s side, the Labor senator Doug Cameron is even more frank about how miners have thrown their weight around this year. ”I think the behaviour of the miners is the most overt case of big business using their power and privileged place in society to protect their own individual interests,” Cameron says.

”This is going to be something that is debated for many years, in relation to how you can ensure the national interest is placed before the interests of mega-rich mining magnates.” More sympathetic observers, however, say the miners were able to make a convincing argument against paying more tax because the public identified with the industry.

A former head of the Minerals Council, David Buckingham, says miners benefited from a perception that the industry had been an important factor in Australia weathering the global financial crisis. Over the previous decade, he says, the industry had also remade its public image around its handling of environmental and Aboriginal issues.

”There’s been an evolution in the position of the industry. I don’t think it’s simply been a case of a big ugly industry using its muscle,” says Buckingham, who supported the concept of a super profits tax.

Whatever the reasons for the government’s backdown, the miners’ strong influence over government will linger.

If Canberra cannot reach a deal with the states, miners have made it clear they will consider restarting their campaign of destabilisation.

In the weeks before Christmas, the boss of Xstrata Coal, Peter Freyberg, repeated his warning that the company would review $20 billion in planned projects if the government failed to refund all royalties.

Indeed, some official sources suggest the mining companies are deliberately seeking to exploit the government’s razor-thin majority in the lower house in anticipation of the debate heating up.

Small miners – who remain deeply opposed to the tax – would only need to convince a few rural independents to oppose the tax to defeat it. Coalition senators are now leading an inquiry which has aired small miners’ concerns, and is scrutinising the government’s deal with the big three.

In spite of this tension between the government and smaller miners over the tax, there is growing economic evidence that now is the right time for a meaningful resource rent tax. In November, the Organisation for Economic Co-operation and Development said the government’s mining tax was too narrow – and it should tax more products than iron ore, coal and gas.

While it supported the tax overall, the OECD said this focus on only parts of the resources sector could distort investment and would hurt its ability to raise revenue.

The governor of the Reserve Bank, Glenn Stevens, has also reminded the government that with a once-in-a-century mining boom gathering pace, now could be a good time to increase public sector saving.

In a November speech, he suggested a ”stabilisation fund” that could offset some of the volatility of a commodities boom led by China and India. Stevens didn’t mention the mining tax – but it’s increasingly clear the watered-down MRRT won’t be taking much heat out of the mining boom.

An economist at the Grattan Institute, Saul Eslake, is blunt when asked if the tax could help deal with some of the challenges of the two-speed economy. ”No, because it was not intended to, and now it would seem there are so few companies that are going to pay it,” Eslake says.

Even among companies which will pay the tax – it only applies to those earning more than $50 million a year – there are doubts it will raise the revenue Canberra claims.

According to official estimates, it will raise $7.4 billion, down from the previous $10.5 billion predicted before the election and $12 billion under Rudd’s super profits tax.

The government says the latest revision was driven by the strong Australian dollar, but analysts say the forecast was more likely slashed after officials consulted with companies about how the tax would be paid in practice.

And with each downgrade in how much revenue it will raise, the government is also pushing the friendship with the Greens, needed to pass it through the Senate in 2011.

The Greens leader, Bob Brown, sent the government a reminder in late December that his support is not guaranteed. He described the tax as a ”patched-up deal between the government and the mining barons”. He prefers the 40 per cent tax favoured by Rudd, and it is not clear whether he will support the mineral resource rent tax.

Cobbling together support from Brown, miners and the premiers of mining boom states won’t be easy. But this is the task facing Swan if he is to make the mining tax a reality.

This story Administrator ready to work first appeared on Nanjing Night Net.

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