Labor digs itself into fresh trouble

Eric Lobbecke

LABOR'S success in passing its mining tax into law is a victory that ends nearly two years of political horrors over the tax - yet its flawed design carries two electoral time bombs certain to torment the Gillard government.

This tax pits the states into conflict with the national government. The pending victory of Campbell Newman's Liberal National Party next weekend will accentuate this clash, with conservative state governments defying Julia Gillard and Wayne Swan in the cause of their constitutional prerogatives on state mining royalties.

The tax also pits the Gillard government against the business community, large and small, given that the mining package involves an increase in the superannuation guarantee levy from 9 per cent to 12 per cent and there is no mechanism to finance this provision apart from an extra impost on employers.

In short, basic unresolved design features of the mining package will spill into problems that beset Labor, notably its poor relations with the states and business.

In theory, the entire proceeds of the mining tax could be lost given that state royalty increases will be credited by the national government so miners do not meet such costs.

How absurd is this situation? Of course, the states will not lift royalties to the extent the tax is worthless. The point, however, is that the design is defective. The tax needs to be underwritten by a new deal between Canberra and the states that still awaits.

The initial Henry report said the national resources tax should replace the inefficient system of state royalties. It was an improbable financial and constitutional task that was never tackled.

The upshot today is a bitter political deadlock between Canberra and the states. To preserve the mining tax's integrity Swan must stop state governments from increasing their royalties and he has threatened financial retaliation against states using their powers.

In Swan's letter to state treasurers of November 21 last year he said the minerals resource rent tax required an arrangement "to ensure that the states and territories do not have an incentive to increase royalties". He made clear Canberra would reduce infrastructure funding to states from the mining tax proceeds if they lifted state royalties, thereby reducing the MRRT revenue, effective from July 1 last year.

Resources Minister Martin Ferguson said yesterday if states lifted their royalties they would not retain the same infrastructure spend. How will the states react? It's obvious. They will intensify their political campaign against Gillard Labor.

West Australian Premier Colin Barnett leads this charge. NSW Premier Barry O'Farrell has plans to lift state royalties by $944 million over four years so he is a target of Swan's threat. It is a likely bet that Newman, as Queensland premier, would move on royalties rather than be intimidated by Labor. Just as the mining tax is popular for the national government, so lifting mining royalties is popular for state governments.

Conservative state governments, therefore, will fight such threats by Gillard Labor. This issue goes to constitutional powers and financial discretion. It is true Labor can prevail using the commonwealth's financial powers, but at what electoral cost? This issue is a vote-losing proposition for national Labor in WA, Queensland and NSW despite public support overall for the principle of its new mining tax.

This dispute has escalated into the review of distribution of GST revenue among states being conducted by Nick Greiner, John Brumby and businessman Bruce Carter. In Swan's letter of November 17 to this panel, he amended the terms of reference to include the mining royalties issue. This infuriated Greiner.

The panel's interim report to Swan is about to be delivered. It will ignore Swan's direction and report on changes to the equalisation model based on merit. It will deliver a separate and later report looking at solutions to the mining tax fiasco.

The real choice facing Labor is unpalatable but obvious. Crediting the mining companies has created a brawl with the states that will damage Gillard Labor. It can either live with this brawl or change the policy to compel the mining companies to actually pay any increases in state royalties.

This is an elementary proposition but it runs the risk of resurrecting a brawl with the miners that substitutes for the current brawl with the states. That's the core of Labor's problem, which is 100 per cent self-created.

Exactly the same comment applies to Labor's irresponsible management of the superannuation guarantee levy. Labor keeps implying the mining tax finances this increase from 9 per cent to 12 per cent. It doesn't. At present, business is meeting this cost. And Labor has misjudged the anger of business on this issue.

Indeed, nothing better illustrates the difference between the Gillard and Hawke-Keating governments. The original Hawke-Keating levy increase to 9 per cent was a negotiated deal with the unions that involved a wage trade-off sanctioned by the tribunal. No such deal exists today. The employers are totally in the firing line.

Chief of the Australian Chamber of Commerce and Industry Peter Anderson said: "The package doesn't spread the benefit of the mining tax boom to non-mining business because hidden in the detail is a 3 per cent or $20 billion per year rise in the superannuation levy paid by employers large and small.

"It's unbelievable that a 3 per cent levy increase on the payroll of a million private businesses has been imposed without a funding basis. Yet that is what the government has done. It has legislated the levy rise and will work out how to pay for it later. For employers, the absolute core minimum need is a legislated mechanism for a wages trade-off."

Anderson knows this will be extremely hard because the trade unions have no incentives to co-operate. Their gains have been legislated. And without a centralised wage system it is hard to apply a universal rule.

The Australian Industry Group's Heather Ridout says it is "vital" that Labor brings immediate amendments to the Fair Work Act to compel the tribunal to take the increased levy into account when determining minimum wage increases. She calls on Bill Shorten as minister to act to ensure the levy is taken into account when enterprise agreements are negotiated.

In short, the employers are stranded. The extra costs they pay from the higher levy will outweigh their gains from the one percentage point corporate tax cut. Beneath Labor's propaganda implying the mining tax bankrolls the super to 12 per cent is a full-scale policy failure that, once again, is self-created.