Gillard moves to annex the centre

Prime Minister Julia Gillard. Picture: Craig Borrow

UNDER tough circumstances the PM has negotiated a win for her party.

SUDDENLY the brand of Gillard PM has turned to gold. The compromise with the major miners that would have been seen as craven weakness under Kevin Rudd, appears under Julia Gillard to be an act of judgment, negotiation and realism.

For Gillard, this deal is a multiple victory: it defines a new prime ministerial style, an end to the political war with the mining industry and, on the figures, retention of almost all the tax revenue the government had initially projected.

It seems almost too good to be true. The compromise transforms the politics of the resources tax. It puts Gillard Labor in the political centre and forces the Tony Abbott-led Coalition out to the right. In a fateful move Abbott has decided to fight the new Gillard tax. The mining industry has sued for peace, but Abbott remains at war.

This deal signals Gillard's election strategy. She will be chasing the middle ground that Rudd lost. "The next election is a referendum on tax," Abbott said yesterday. "We will oppose this tax in opposition and rescind it in government." But this is now a brave call. The big miners are pledged to prolonged negotiations with Labor. It is a classic study in the power of incumbency; Gillard has the

authority and judgment that Rudd lost.

She has won in-principle agreement from the major miners to a new tax deal that delivers $10.5 billion instead of $12bn across the forward estimates. Labor has got the best of this compromise, as Treasurer Wayne Swan's comments implied. Shadow finance minister Andrew Robb cannot believe the numbers, saying the claims that such concessions will only cost $1.5bn are "simply laughable".

The faction chiefs and caucus members who engineered Gillard's coup will feel the first taste of policy vindication. Resources Minister Martin Ferguson finally moved to the centre stage in the negotiation. But the key to breakthrough was Gillard and the clarity she brings. The lesson concerns Gillard's skill at the political fix and her ability to strike deals on her side of the ledger.

The major miners have abandoned their advertising campaign and political assault. Abbott wedged Rudd on the resources tax, climate change and boat arrivals, but Gillard, in her first substantive move, has found a fresh path. Her obvious tactic is to neutralise each point of Labor weakness as a prelude to calling an election.

Facing a conceptually revised tax the big miners, BHP Billiton, Rio Tinto and Xstrata, said the new proposal represented "very significant progress" towards their principles and they would "work constructively" with Labor on the details. A policy transition group headed by Ferguson and former BHP chairman Don Argus directs future negotiations.

Understand that this deal is a political fix from the untenable position embraced by Rudd and Swan in their resource super-profits tax as advocated by Treasury chief Ken Henry. Abbott was right to say Gillard seeks credit for salvaging a mess. But pulling Labor from this mire is Gillard's job.

"I've put my stamp on the approach that was taken here," she said. It is the first step in getting the government "back on track". It showed her determination to find consensus. "I'm a pretty frank person," Gillard said. "I'm not afraid of a difficult conversation."

She believed a resources rent tax was necessary and was willing to negotiate in good faith. Her message to the public is that Labor's central policy goal is achieved. Make no mistake, Gillard put the miners under pressure. The upshot is that Labor has a new tax framework that Gillard believes will carry an election campaign against Abbott.

It is not pretty: the entire process has been a shambles for nearly two months; the party had to change its prime minister, but politics is rarely a smooth ride.

Labor has not just unveiled a new policy. It has done a deal. There are agreed principles with industry set out in a heads of agreement. The RSPT, with its emphasis on super profits, is replaced by a new minerals resource rent tax at a rate of 30 per cent, as opposed to 40 per cent, applying to coal and iron ore, thus admitting the need to differentiate by commodity.

There is a 25 per cent allowance for extraction activity so that only resource profit is taxed. The tax threshold will be lifted to the long-term bond rate plus 7 per cent.

Existing projects will benefit by entering into the tax at the market value of the business (not the book value) with depreciation over 25 years.

Small miners with profits below $50 million annually will have no resources tax liability. In addition, the existing petroleum resource rent tax will be extended to apply to all oil, gas and coal seam methane onshore and offshore.

Minerals Council of Australia chief Mitch Hooke said: "This package is broadly consistent with the minerals industry's underlying principles of tax reform: international competitiveness, sovereign risk and competitive neutrality across company size, commodity mix and ownership structure."

BHP Billiton chief executive Marius Kloppers said: "We are encouraged that the MRRT design is closer to our frequently stated principles of sound tax reform." He said talks at Gillard's request had been "constructive" - a dramatic change from his criticism of Rudd - and BHP Billiton would work with government to ensure the competitiveness of Australia's resources sector.

This penetrates to Abbott's new problem. The tax, though a patchwork, is not the demon it was: it has been Gillardised. Decoded, this means taken towards the middle ground. Abbott's new dilemma is captured in his own words: "We've changed the prime minister to change the tax, but you're going to have to change the prime minister to dump the tax."

But will Australians want to dump the Gillard tax? "It is still a bad tax," Abbott insisted. Yet this claim is undermined by the words from the miners.

Gillard has a heads of agreement and an ongoing Ferguson-Argus negotiating process. The real problem was the tax's design, not its principle. For the Coalition, however, the real problem was the principle: it rejects any form of resources rent tax. This hardly seems a winning position.

Abbott's pitch will still have traction in Queensland and Western Australian. There will be miners still unhappy enough to speak out. Instinctively, Abbott felt unable to quit this battle.

If he had rolled over, Labor would have accused him of abject retreat yet by holding firm he risks being seen as isolated, static, extreme and opposed to reform.

Gillard's pitch is that a fairer tax system on resources will benefit the nation overall by promoting superannuation, infrastructure and modest company tax cuts.

Her ability to sell this message in an election and win a mandate for her resources tax against both Abbott and the Greens should be under-estimated.

The episode affirms the task facing Labor: fighting Abbott on the right and the Greens on the left. But Gillard will probably handle this dual struggle better than Rudd. Gillard's mining deal underlines the essential political character of her new government and her limited options succeeding Rudd on election eve.

The concessions to miners are partly financed by the rest of Australian business with the company rate only cut from 30 per cent to 29 per cent, not 28 per cent as in the original Rudd-Swan policy.

The business lobbies are unhappy yet helpless. Australian Industry Group chief, Heather Ridout, said the company tax retreat was "deeply disappointing".

The squeeze is accentuated by employers looking to the lower corporate rate to help finance the increase in employee "super" contributions from 9 to 12 per cent. Gillard should realise this will become an election issue.

Ridout wants a formal deal on lower wages to help employers reach the target, a line sure to provoke the unions.

In a wider sense, tax reform is left bashed and buried in a policy ditch. This is a government more focused on redistribution than growth. Labor's main response to the Henry review is still a resources tax, yet one of Henry's aims was to reduce company and capital taxes. He recommended the corporate rate be cut to 25 per cent while Gillard now sits on 29 per cent and Abbott, because he rejects the entire package, is out of the debate.

Gillard and Swan talk about doing more on tax when the fiscal situation improves. Yet if they unveil a series of new spending priorities in the campaign such tax reform claims will be exposed as hollow. Relations with the business community are damaged and remain fragile. Swan will be under greater scrutiny as a result of these events; he was pivotal in the

RSPT and in the Rudd government's refusal to make substantial concessions.

But the story is Gillard. Negotiating in broken traffic, she has delivered a political win for the Labor Party that backed her. As her authority builds, Abbott's is threatened.