27 June 2010

The Mining Tax and the PM's Downfall

I’ve been neglecting my blog, focusing on the fortunes of Australia, Germany and Brazil at the World Cup.

However, events in Canberra this week inspired me to post.

I woke up on Thursday morning intending to watch the last roar of the defiant Soccerroos as they fought for a desperate and ultimately pointless victory against Serbia.

There is something sublime about fighting for a lost cause, but I’ll leave that for another day to dissect.

Instead I woke to a leadership spill in the Australian Federal Government that was executed with brutal speed and efficiency and which left a former loyal deputy standing over the political corpse of her former leader. Indeed the numbers so lopsided, the move so irresistible Rudd didn’t even contest the ballot.

Looking back, Rudd might reflect on the fact that his downfall was caused in part by the backlash against his proposed Resources Super Profits Tax.

He was so confident about this being popular, he was prepared to take it to an election.

He must have viewed this as a way that the government could collect more revenue without increasing tax on the ordinary people of Australia, thinking “Surely voters will see that a tax on very rich miners will benefit them”?

Instead of being viewed positively, the proposal sent his popularity plummeting to the point where his own team dumped him.

In my view, this reaction is a predictable outcome if you think in terms of Public Choice Theory.

Public Choice Theory is one of my personal favourite tools for explaining democratic politics. It posits that political decisions are marketable commodities that can be bought and sold with money, influence and lobbying.

In such an environment small well funded groups competing for concentrated gains will triumph over large disparate groups where the gains to any member are relatively small.

RSPT pitted a very small, very powerful group of mining magnates defending a huge amount of personal wealth against the entire nation fighting for at best a very small amount of personal gain should the tax go ahead. Whether in practice the tax would have benefitted the majority of Australians or not, I’ll leave for others to debate, however, the one thing it was certain do was reduce the profits of the big miners like BHP Billiton, Rio Tinto and Fortescue Metals Group

Their reaction was predictable: They fought it with all the power and strength their considerable resources and influence could bring.

If Rudd predicted this, he might have comforted himself with the notion that voters vote with their hip pockets and would reward his policy because, it would not involve a tax on the ordinary person. However, his timing was lousy. You don’t pick a fight with powerful interest groups in the run up to an election. It means you have to defend a policy rather than a detailed plan.

A policy lacks detail, which allows your enemies to create hypothetical detail and then attack it. In the US they saw this with their recent health care debates, with Republicans predicting that the legislation would create death panels and that people would be allocated doctors rather than seeing their own GPs.

What US President Obama understood (and Rudd didn't) was that if you are going to face entrenched opposition from powerful groups, you need to have time to get out a structured plan. Even then, his health reform bill went right down to the wire.

RSPT suffered from the same problem. Without a clearly detailed explanation of the tax, those opposed were free to predict disastrous consequences to whip up pubic fear.

So we saw little old men on television saying “you know, I’m just an ordinary street sweeper, but this mining tax will kill my superannuation and wreck my life”. A little fear goes a long way in the public’s mind.

The miners' relentless ad campaign successfully reframed the debate from a discussion as to where the tax burden should fall in Australia, to whether the RSPT would destroy the prosperity of Australia.

With the public offside, the polls falling and the Prime Minister unsupported, it was a quick and easy hatchet job for the power brokers in the party.

I don’t think in their wildest dreams that Twiggy Forrest and Marius Kloppers thought they would bring down the Prime Minister in their campaign or even wanted to, however, the response from the miners to the RSPT was a key factor in pushing the ALP down in the polls to the point where an internal coup was possible.