Abbott caught in a trap as Labor makes a risky call, again

THE Greens are the only winners from the political stand-off over tax cuts for big businesses.

A STRANGE fate has befallen Labor's revamped mining tax on the brink of parliamentary passage -- the populist tide Tony Abbott once exploited against the tax now swims Labor's way.

It is unusual for the Opposition Leader to find himself against populist sentiment. But this has become his destiny on the mining tax. His denunciation of the initial mining tax in May 2010 was a brilliant move that helped fuel hostility towards the tax, the Labor government and Kevin Rudd. But the caravan has moved on and sentiment has shifted. Labor's mining tax package is now a problem for Abbott, not a bonus, as the Coalition's electoral attack and its political hopes now focus on carbon pricing and far less on the mining tax.

Abbott's political problems were on display this week: he opposes a mining tax now sanctioned by the big three (BHP-Billiton, Rio and Xstrata); he is being demonised by Labor as the billionaires' mate to undercut his campaign to win working-class voters. And he is further attacked by Labor for denying on grounds of fiscal consistency the concessions being financed by the mining tax, notably the cut in the corporate tax rate from 30 per cent to 29 per cent.

In a sense Abbott is locked into a lose-lose situation. He was trapped whatever he did. Taunting Abbott in a display of Labor populism, Gillard said: "The only people he listens to are billionaires. They're setting his policies for him." She said Abbott's position meant saying to business: "We want you to pay more tax, even though the Labor government wants to take a bit of the tax burden off you." Wayne Swan ridiculed the party of Menzies and Howard opposing relief for small business and lower corporate taxes.

Just imagine, however, what Gillard and Swan would allege if Abbott obliged and backed their corporate tax cuts. It's a no-brainer and would run as follows: "Mr Abbott opposes our mining tax but backs the concessions it finances. He is a financial fraud not to be trusted. He must reveal how he would finance the corporate tax cuts he is supporting."

Abbott would be a mug to embrace such fiscal inconsistency, more so since the Coalition's current aim is to consolidate its fiscal credentials. At the last election Abbott's policy was a modest 1.5 per cent cut in the corporate rate financed by savings. This week he said the Coalition would back a "modest" tax cut. Perhaps not much different from Labor. The quantum will be left for the election. Remember, however, Abbott's paid parental leave scheme is financed by a 1.5 per cent levy on top companies.

The bigger policy difference is Abbott's rejection of the mining tax and his pledge to repeal it in office. It is too late in the day for Abbott to rethink the mining tax rejection (say, pledging an improved tax) since it raises only an estimated $10 billion over three years. Abbott, however, made a critical reversal last year: the Coalition will support the lift in the superannuation guarantee from 9 to 12 per cent, a policy that gets some funding from the mining tax. It was a historic change in the Liberal stance.

Gillard and Swan will wage a campaign against Abbott on the grounds the Coalition is opposing the concessions for small business as well as the corporate tax cut. The only measure that faces defeat, however, is the tax cut for medium and large businesses because of a distinction the Greens make over tax cut entitlements for companies (being small is good, big is bad).

The Greens' pursuit of this distinction is crazy policy and a serious embarrassment for Labor. Have no doubt, Swan needs this package, the whole package. Its integrity is now under threat. This arises because the originating purpose in the Henry tax review was to cut Australia's corporate rate to 25 per cent because it failed the test of international competitiveness (remember that quaint idea).

The logic was to confront the two-speed economy by using mining tax revenue to finance a more competitive tax regime for the rest of the economy. An exasperated Heather Ridout of AIGroup said that with 80 per cent of the economy growing by only 1 per cent annually "we really need a tax cut."

This is not some cheap bribe; it was supposed to be tax reform. Indeed, the start of a bigger tax reform. Ridout said that tens of thousands of companies would miss out. "Irrespective of the mining tax, we need a cut in the company tax rate," Ridout said.

It's the old story of current politics. When Labor is under assault from both Coalition and Greens, it cannot prevail. The symbolism for Gillard and Swan of failing to get this measure through will be lethal for their relations with business. The most bizarre assertion this week was the claim that the Greens are doing Labor a favour because it will have more revenue to get to its 2012-13 surplus. Sure.

Consider a few home truths. This is a parliament that excels at joint Labor-Green taxpayer imposts, having negotiated a carbon price far higher than the international price, a flawed mining tax, a tough means testing of the private health insurance rebate, passage of the NBN with its exposure to the public purse. And yet it seems unable to legislate even a minuscule cut of one percentage point for large and medium-sized businesses, many of which struggle with a higher exchange rate. That's just too hard. Such is the sad condition of Australian public policy today.

Don't let anybody pretend that our international competitiveness is not undermined by politics. Don't fall for denials of this proposition. Political risk is now integral to Australia's outlook. The problem with the current parliament is legislative majorities are formed by Labor-Green-independent votes and the results, while not without merit, are biased towards higher taxes or charges that, more often than not, undermine international competitiveness.

Frustration with the current government and parliament is only deepening, a point many "inside the beltway" fail to grasp. In a telling statement, chief of the Business Council of Australia, Jennifer Westacott, branded the Greens' last-minute amendments as "reckless and economically irresponsible". She lamented political reluctance to support an economy-wide company tax cut and the launch of a bizarre new brinkmanship "over which if any businesses need a more competitive tax environment".

Westacott said the mining tax was a "poor example" of tax reform and, worried about artificial divisions being created for political purposes. She said that "in reality businesses of different sizes are deeply interdependent".

Maybe Labor will eventually prevail on the corporate tax cut. Maybe. But Abbott's self-imposed trap means he probably cannot move. And the Greens have played Labor beautifully off a break, yet again. Consider what has happened: the Greens have given Labor its mining tax but denied much of its corporate tax cut, proving that if Labor wants to exploit the politics of envy the Greens will outbid them every day.

The Greens want a mining tax that would raise $100 billion more over 10 years and opposed any company tax cut that constituted "a handout to big banks and big mining corporations". How did Labor respond? It gave the Greens political immunity and attacked Abbott exclusively.

Wrong call, again. Labor cannot fathom the politics of fighting on two fronts. It entrenches its image as governing in partnership with the Greens yet is picked off by the Greens at their selective discretion.

Who will business blame if the tax cut is not delivered? To some extent Abbott, to a bigger extent the Greens, but business will sheet home final responsibility to Labor as the governing party and to this parliament. The longer the parliament runs, the more disillusioned is corporate Australia. That's because its legislative output depends upon Labor-Green-independent negotiated compromises. The Greens have Labor in a political straitjacket that they loosen or tighten according to their own interest.

At the same time Gillard's strategy, after her victory over Kevin Rudd on the leadership, is to elevate the economy as an issue and improve her ties with both small business and corporate Australia. It is entirely sensible.

Labor knows it faces certain defeat if the next election is a referendum on the carbon scheme or a referendum on Labor's record. Its only strategy is to make the election a contest over competing agendas. That means minimising the carbon issue, building Labor's economic credentials and, above all, destroying Abbott's economic standing. All of Labor's energies are being devoted to this task. The subtext is that Abbott is a different Liberal leader, devoid of the economic credentials of either John Howard or Peter Costello.

In this context Gillard said: "I understand the case of business to have a lower company tax rate but I'd make this very simple point: you can't get to 25 cents in the dollar by not starting to bring the company tax rate down."

Gillard is correct. The revenue does not exist at present to get anywhere near the 25 per cent rate. Yet in this contest for economic credentials and business recognition, Gillard faces two daunting obstacles.

The closer the start date of carbon pricing the more alarm grows in wide sections of business about its consequences. The more the Fair Work Act is entrenched, the more business is hostile to its application. For Labor, the carbon scheme and the IR laws are fixed beyond any significant alteration. That's the problem. Labor's tragedy is that its ability to turn the economic debate by its mining package, its coming budget surplus and other economic reforms is limited by existing perceptions for which there is no cure.