Monday, May 10, 2010

Communications, policy and the resource rent tax

In writing Sunday Essay - problems for stay-at-home dads, I mentioned that I had been going to write on another topic. That topic was in fact professionalisation in politics, a follow up to some comments I made in Saturday Morning Musings - elections past.

I will finish that post. There was nothing especially profound in my remarks, simply personal observations based on my experience at a time when professionalisation was first entering Australia's political system. I thought that it might be interesting and perhaps relevant to review this.

While I still have to finish the post, current Australian developments make me want to comment on one aspect of the professionalisation process.

In my musings on elections past, I commented that in setting up the Country Party campaign for Eden-Monaro we had access to neither public opinion polls nor focus group results. I thought that that had had advantages.

Today's Sydney Morning Herald carries a story based on the latest public opinion poll suggesting that support for Australian PM Rudd had fallen to record lows, with more people opposing than supporting the proposed resources rent tax. However, the loss in Labor support has not translated fully into support for Mr Abbott.

In the midst of commentary focused on Labor's failure to get the message across, I wanted to disentangle some of the issues.

A resource rents tax of the type proposed involves a number of issues:

  1. There are the general economic arguments in favour of the tax. Because resources are limited, those supplying them are able to extract economic rents (the super profits Mr Rudd refers to) that do not flow onto the Australian people. Taxation allows Australia to share in the profits. 
  2. There are then the specific economic and financial arguments relating to the impact of the tax as proposed. As an example, any tax that reduces the return on capital will affect investment and economic activity. With any tax, these types of impacts need to be tested. For example, falls in investment will reduce future returns from the tax, as well as other taxes. In some cases, these falls may be sufficient to offset the gains from the tax.
  3. The distributional impacts of the tax need to be considered. Who will benefit, who will lose, what does this mean?
  4. Technical issues also need to be considered. Exactly how will the tax be collected? What problems are likely to arise?
  5. Finally, there are the political issues associated with the tax. Who will support, who will oppose, how will it all be sold?

It may sound dumb to say this, but in some ways the political issues are the least important. They affect the decision as to whether the tax might be introduced, they affect how the tax might be sold, they may cause modifications to the tax to accommodate political interests. However, all this is of little consequence if the tax itself won't work in economic or financial terms or cannot be properly collected.

It was always going to be the case that a resource rent tax would attract some opposition from the mining industry. It was always going to be the case that a resource rent tax would create difficulties at state, regional or local level because of its varying effects on economic activity and on royalty revenues. It was also always going to be the case that the exact parameters of the tax would need refinement. All these things hold regardless of the general arguments for or against the tax.

Now look at what the Government did. It:

  1. Launched a complicated package, combining revenue and expenditure elements, with capacity to deliver defined benefits dependant upon defined revenue.
  2. Launched a political campaign to sell the tax using populist rhetoric.
  3. Included in the package implementation lags and announced that it would be consulting industry as to implementation details. In theory, this provides time for adjustment and refinement. However, steps 1 and 2 mean that the Government has locked itself in in both financial and political terms to the extent that any variations risk being seen not as a concession, not as a sensible adjustment, but as a back-down.

All this is a high risk strategy.

I am sure that in developing the package, the Government obtained economic, financial and technical advice from the Australian Taxation Office and from the Departments of Treasury and Finance. While I have a high opinion of the capabilities of the officials involved, I also know from past experience that such advice needs to be tempered by subsequent test and analysis. It is just not possible for officials to determine all the likely effects of complex packages now and over time.

Take, as an example, the use of the bond rate as the return on investment point from which the super tax will apply. Leaving aside issues associated with the definition of return on investment, the bond rate is a very low benchmark. On this basis, much of Australian industry is (or should be) earning super profits.

I may be wrong, but I suspect that this began as an initial starting point, providing the Government with the capacity to make adjustments, perhaps to the 11% figure that I think applies (I stand to be corrected) with the equivalent petroleum tax. I say initial starting point because it is hard to believe that anyone could seriously argue that the bond rate (the return on a risk free investment) marks the start of super profits. However, if this was the case, the Government's "communications" approach (to use the modern jargon) has hardly been helpful.

Linking this back to focus groups and public opinion polls, modern governments have access to a range of sources of information on public opinion and on the impact of decisions on public opinion never previously available. They also have professional communications apparatus all carefully crafting responses for different media. However, all this can create a disconnect between messages and real policy realities: communication's requirements come to overshadow real content.

  Note that in all this I have not said whether or not I think that the Government's overall package is good or bad in policy terms. Accepting that it will need adjustment, I am consciously keeping an open mind for the present until we know more.


Winton Bates said...

As I have written on my blog, I think well-designed resource rent taxes are less objectionable than other ways of obtaining revenue from minerals. But I don't like the way the government is trying to use this new tax to grab an additional slice of mining profits just because commodity prices have increased. I think they are damaging Australia's reputation as a safe destination for foreign investment.

Jim Belshaw said...

I agree with you totally, Winston. It's not just what is done, but also how.

There is some funny stuff coming out in the papers as it applies to official attitudes. Treasury has always been anti-intervention, yet some of the views attributed to Treasury strike me as interventionist in the extreme.