Post-mortem on the RSPT II: observations and lessons

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In May of this year, the Australian government announced a tax increase on the mining company whereby all profits over the long-run bond rate would be taxed at 40%, with off-sets for losses. This tax on the rent created by the boom in mineral prices was spent on reductions in the company tax rate and on various overall subsidies. Following a fairly extensive campaign by the big mining companies and their representatives such as the Minerals Council Australia, the government in July negotiated directly with the three major mining companies and reduced the planned tax increases in return for the explicit promise to stop campaigning. If we compare the revenues the tax would have gotten (under the revised price estimates) with the current expected revenue, it seems radio silence has come at a cost close to 5 billion dollars per year. In terms of discounted values, every dollar spent on campaigning by the mining industry seems to have paid off (ball park figure) something like a thousand dollars in less tax.
Elsewhere, I have talked about how the media campaign was made up of false arguments and wild exaggerations. Essentially, jobs and investments in mining were never truly at stake and it was a straightforward fight over money with on the one hand a few dozen billionaires who stood to lose and on the other hand millions of small businesses and consumers who stood to gain but of whom a fairly large slice was scared into thinking they were going to lose.
Observations:
1. One lesson from this saga is that negative campaigning works, particularly in an election year. The basic recipe for protecting privilege has been applied here: muddle the argument; roll out experts with minor doubts and represent those doubts as sincere opposition; get the masses to believe something unfair is happening and they have something to lose; and never once talk about money. Not once did the media blitz even try to run the argument that it is fair for billionaires to make more money out of Australia’s mineral resources. The eventual outcome, 5 billion dollar less taxes for the mining industry per year, was never put forward as the goal of the campaign. Will the mining companies give this bonanza to charity? Don’t count on it.

2. The super-wealthy stood fairly united. As I remarked in an earlier blog, other wealthy organisations who make their money from rents, like property developers, banks, and most financial institutions, could have expected to be the next in line for tax increases. This is clearly the whole idea of the Henry Tax review. Probably as a result of this, Business Councils did not line up behind the tax even though all non-mining businesses clearly won out because of the reduced company tax rates.

3. Nothing is secret when this amount of money is involved. The mining industry had clearly prepared for this campaign long in advance, even though the Treasury tried to keep the exact plans secret.

4. The dip in Rudd’s popularity was used to settle old scores within his party and his administration. They must have really hated his guts.

5. The media seems to have been a victim in all this, being fed stories about Rudd from within his own circles, being fed all kinds of storylines by the mining interests, and being bombarded with opinions from all and sundry. No wonder the mainstream media had no idea what to believe.

Lessons:


How will this affect the behaviour of politicians in the future? One clear lesson for them is only push through controversial policy changes at the start of an administration, not later on. This has been an old political adage that was violated in this case, perchance because of the personality of Rudd, perchance because of the public failure of the ETS policy, or perchance because of the timing of the tax review. Whatever the case may be, I expect both Labour and the Liberals to refrain from doing anything interesting later on in their administrations and pack all the reforms early on in the electoral cycle. By the same token, we should expect senior civil servants to now only put out the results of major reviews at the start of the electoral cycle.
How can we avoid seeing this kind of debate dominated by private consultancy reports? Using private consultancies has been a failure, with such consultancies then double-dipping in terms of also working for the other side. To prevent this in the future, Australia needs an independent public modeling capability to calculate the effects of budgetary changes. An independent modeling capability could either be housed within existing institutions, like the Reserve Bank (which has plenty of economists and not much more to do than say ‘up’, ‘down’, or ‘steady’ once a month), or in a new institution.
As to Rudd’s demise, one lesson to be taken from that is that the leadership cult that is quite normal in Queensland is incompatible with the political culture in NSW, Victoria, and Canberra: the command-and-control mentality Rudd brought from Queensland to Canberra is simply not tolerated in the more cooperative culture of the South East.

A big unknown is whether this is the end of the main idea of the Tax Review, which was to tax the sources of wealth in this country that are not based on ability or hard work, but that derive from existing privilege and political protection, such as mining rights. Fighting privilege inevitably meant a political fight.

Nicholas Gruen indicated he thinks it is now curtains for any policy that tackles privilege. If true, it means the Henry review is dead and that we are hence back to taxing the middle classes on the basis of their talents and efforts. I still hope he is wrong and that instead this episode has alerted those who care about the longer-term well-being of Australia to the fact that a privileged few are arrayed against them and will use any means of disinformation to protect the sources of their wealth. I hence hope this is the start of the long road to implement the Tax Review, not its Swan-song.

10 Responses to "Post-mortem on the RSPT II: observations and lessons"
  1. The lesson isn’t that it is curtains for any policy that attacks privilege. The lesson is that if you are going to attack privilege, you need to have done a lot more to prepare the ground for the policy (consulation, green paper/white paper) and then understand your policy well enough to explain it in simple terms to the electorate. The process through which the RSPT was announced was very poorly handled. It also helps if you have consulted properly with your own party so that the majority of caucus members are prepared to absorb temporary electoral setbacks/bad polling that come with the policy. Reform is always more difficult when support is not bipartisan. Howard managed to deliver the GST in the face of opposition, (which was also announced close to an election by the way) because: a) there was widespread support within the party; b) he was prepared to take Labor’s opposition on; c) they had thought through the politics by offering big income tax cuts in compensation. The benefits from the RSPT were too diffuse and too abstract for the average voter to get excited about.

    I like the idea of an independent authority. The quality of debate about issues with big fiscal implications is terrible in Australia. You have a politicised Treasury on the one hand and private guns for hire on the other. A credible independent agency would help cut through the crap. The RBA is the wrong place to house it though as it has very little expertise on public finance issues and giving it responsibility for reviewing politically sensitive policies such as the RSPT could undermine bipartisan support for its independence. Getting monetary policy right is also a touch more complicated than up, down or stay the same. And the RBA has a financial stability arm, a payments policy arm, and a financial markets arm.

  2. LO,

    to have an independent authority as an annex of an existing authority is not so unusual in countries that already have them. As long as you give them a separate name and mandate, virtually no-one will know that they are part of the RBA or even Treasury. The ‘Office of Budget Responsibility’ in the UK is for instance an off-shoot of its Treasury.

    As to the optimal way to sell reform, I am not so sure that the longer process you describe would have worked better in the case of the RSPT. When, ultimately, there is a lot of money available to politically fight the policy, implementing it fast in order to create ‘facts on the ground’ has its merits. As Machiavelli pointed out, best to implement all the difficult things at once before anyone notices. If you are going to flag something like this years in advance you will make sure the interests involved are fully organised and focussed against you.

  3. Paul,
    I agree with LO.  The main problem was the government’s failure to communicate.  Vested interests will always fight to preserve their rents.  Governments can only win if they have the public on-side.
     
    Rudd badly overestimated the intrinsic public support for the mining tax.  I think he introduced it as a tactical measure to divert the public from his other failures: ie “here is something that the public will definitely support”.  Taxing a few billionaires must have looked like a no-brainer.  So, maybe there was primarily a “polling” failure
     
    The GST introduction was quite different to the mining tax.  It had intrinsic public opposition, but did not harm any powerful vested interests.  Did Howard introduce any reform that harmed the oligarchy?  I can’t recall anything.

  4. The badly named RSPT was not designed to attack privilege, it was only sold that way. This meant the argument was about whether it was well designed to attack privilege – which it wasn’t. The end result is that we have a tax that attacks privilege being sold as one that insures miners pay fair value for the resources they extract, which it doesnn’t but the RSPT did.
    The lesson: dress a sheep in wolf’s clothing and it will be attacked, dress a wolf in sheep’s clothing and it will be supported.
     

  5. Good wrap up Paul.  I do see why getting the RSPT up in a hurry was a good idea, but as LO mentioned, the sales pitch to the electorate was insufficient to combat the mining lobby response.  Sam’s point about the bad name is also true.

    It is definitely a lesson for aspiring politician on how not to implement changes that make big business unhappy. 

  6. Paul, I just don’t think there is any comparative advantage of attaching it to the RBA given the lack of public finance expertise there. Better to create a new institution from scratch in my view.

    And I disagree with you on process. Successful reform requires some sort of political coalition. If you can’t bring the sector itself on board, then you at least have to a much better job of convincing the electorate it is a good idea and that they will benefit. It is basic political economy. When the government first announced it, it was pretty clear that most ministers, including the PM, didn’t really understand the way the tax worked. The name itself was horrible and misleading. Once the industry decided to oppose it on the details, the government then set out to demonise the sector, using some pretty dodgy empirical evidence. People expect that from lobbyists, but not the government and it undermined their credibility. The RSPT had never been on Labor’s stated agenda before. The original plan was for it to be one element of broader tax reform. The government cherry picked it while ignoring most of the review’s recommendations. The new tax simply confused most of the electorate. Why was this suddenly the government central policy priority?

    Structural reform is difficult. But the government did itself no favours with the way they went about this one.

  7. LO,

    I am not wedded to the within-RBA idea, but do think that it would be relatively easier to expand an existing institution with a new side-office than set up a completely new one. If you put it up with the existing RBA, you start with an HR organisation which knows how to attract economists and how much you have to pay them, has office space, etc.. Hence, you are bound to able to set this up quicker than if you had to start from scratch. And from the 500 economists or so who are there now, a fair few would be quite good at doing the modeling involved. They would have a running start. It hence simply seems the practical thing to do to me.

    As to whether the RSPT could have been sold better, I am less sure. Anything that it seen to fail is accused of not being sold properly. Given the fact that privilege is so seldom challenged, it is very hard to objectively say whether the sales pitch really could have been better. I for instance note that the line Gillard has now (the mining industry should pay more), is more or less what Rudd started out with. Given the particular reports commissioned by the Treasury, it is furthermore clear that this was going to be the flag-ship bit of the Review that was intended for a while to be implemented first. Sure, they didnt see the storm coming and sure, they tried various ways of counter-acting the storm, but can you really say this or that turn, or this or that label, was the fatal mistake? I am not so sure.
    As to current tactics, I think the Labour Party now should say ‘well, we got 9 billion per year more out of them. We’ll get the rest later’, i.e. they should declare victory and prepare for the next one.

  8. 500 economists? There aren’t much more than 500 staff! The economic research department has about 15 economists total. Economic Group has about 50.

    I’m not sure the HR advantages are large enough to justify giving the task to an institution that neither wants to have fiscal monitoring handed to them, or is particularly analytically well equipped to do so.

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