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The big news today is that Julia Gillard is to announce changes to the government’s RSPT. I think the whole thing is being carefully stage-managed, with information coming out in drips and drops to manage expectations.

The news yesterday was all one way – there would be major concessions to the mining companies by the government, and discussing the political implications of that. From their comments, it seemed very much as though the changes all were about reducing how much of the tax was paid, rather than redistributing where the tax fell. Today, it seems media outlets have taken time to reflect and understand these changes better.

The summary effect of all the changes is that the RSPT is no longer structured as a forced joint venture. The government is no longer forcing the miners to accept them as an investment partner. The ‘investment’ features of the tax scheme appear to have been removed – there are no longer generous reimbursements and deductions for the construction expenses suffered by the miners, the $1bn exploration rebate has been removed. In return, the threshold for when the tax kicks in is set at a much more reasonable rate (the long term government bond rate + 7%) which should approximate the miner’s cost of capital. In effect, the RSPT actually acts like a tax on ‘super-profits’, that is those profits above the “expected rate of return” on a project with that level of risk (the cost of capital). In other words, the RSPT is actually structured more like an ordinary and non-distortionary tax.

Another big concession was to ensure the tax did not act retrospectively. Miners didn’t want their existing mines to be taxed. They didn’t win the whole way, but the calculation for existing mines was changed in some way that I don’t understand, but effectively, it was more generous to the miners.

I think the most important part of these good faith negotiations, which has been neglected is this – the quantum of the tax (the total amount raised) has been diminished somewhat – but not as much as expected by many commentators. Instead, the bulk of the changes are aimed at redistributing where the tax falls. It flattens out many of the distortions I mentioned in my last post. To that extent, I think the new RSPT is a profound success.

There are however, several important disadvantages to the new RSPT:

1. This is a victory for political lobbying

In a way, this is a major disappointment for Australian governance and politics because it is very rare that a few companies (as opposed to an entire sector) can change a policy after it has been announced. One of the major reasons Australia has excellent economic management is because independent public servants use their expertise to craft a policy and the politicians sell it to the public. Unlike the US, the political process doesn’t gut the policy before its placed before the People. Unlike the US, a thousand lobbyists can’t change the laws before they are passed. An excellent example is the bailout bill. Our bailout bill was expertly crafted so that it could be handed out quickly and the money was pumped back into the economy immediately. In the US, the bill was debated for far too long, and it wasn’t spent on shovel-ready projects. It was spent on (worthwhile) research projects or this or that – but it didn’t get pumped straight into the economy. This senator wanted it spent on his pet project, or something for his State. Other Senators argued that it should go to the poor because they spend it first. Such arguments are worth having, but let’s not pretend that Congress or Parliament is capable of balancing them in any impartial manner or with the economic expertise of the public service.

2. This hurts the smaller miners

When lay Australians think of miners, they think of BHP, Rio and maybe Xstrata. They think of iron or steel. But what about the thousands of smaller miners? What about the less profitable minerals? The RSPT was designed as a forced joint venture to assist those smaller commodities by shifting the risk away from those companies and onto the government (and thus encouraging them to invest in those smaller commodities). And because the big miners effectively forced the smaller miners to shut up during this debate, they lost out. Those smaller companies were not sitting at the table, and their voices were not heard. That is another unfortunate consequence of the political lobbying.

3. What will this do to incentives to explore for new deposits?

My major concern when I first heard of the RSPT was the fear that it would demolish all incentives to explore for new deposits. These are the riskiest sorts of projects – you have absolutely no idea if you’ll find anything, and you’ve only the wildest guess as to the probability of finding anything. It’s an all-or-nothing gamble. Capping the potential return on investment to (as the initial RSPT did, the 3-5% government bond rate) was ridiculous.

That concern was alleviated once I realised the RSPT was shifting all of the risk from that exploration to the government. But that risk has just been shifted back. Will capping the potential return on investment to 12% reduce the exploration costs? Don’t forget that Australia (or more correctly, the several States) owns those minerals and it wants them dug out of the ground so Australia can profit from them. The miners don’t care if they’re dug up, so long as they maximise profit. I don’t know even close to enough about mining investment to make any particularly educated comment, but my bet is that there are probably some important concerns in this approximate area.

Overall assessment

Despite what I’ve said, I think this is an incredible political victory for Julia Gillard – firstly because she concluded the negotiations so swiftly, and secondly because she actually minimised the damage to the government revenues from these concessions. The policy advantages and disadvantages I have outlined are sort of irrelevant besides those primary considerations. There is a political disadvantage in that Gillard may look weak for backing down on this policy – but she has framed the issue in a way that this is quite a weak argument. It was not her policy. She took a consultative approach, and that has borne fruit, etc, etc. Moreover, it is the best she or anyone could have done in the circumstances. It is a big disadvantage, but it is the smallest possible disadvantage in the circumstances.

I think the equally important thing is that this takes the wind out of the sails of the Opposition in the short and long term. It removes all impetus from their campaign (which recently has centred on the RSPT). It severs a major link between the Gillard and Rudd governments – it makes it a great deal harder to argue she’s linked to her old policies when she just abandoned one of them in a consultative style that blows Rudd’s authoritarian style out of the water. And thirdly, it sabotages the momentum that Abbott gained yesterday with his giant $1.5bn mental health program. That announcement had probably been in the works for a while and most of the benefit of that announcement has just evaporated.

I think this entire episode shows that Gillard will make an excellent prime minister. And when the poll numbers turn against her, I’m sure she’ll make an excellent former prime minister too.

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