Australia's New PM Strikes Tax Deal with Mining Sector, Prepares for Early Election

The New Deal

Just a week after becoming Australia's new prime minister, Julia Gillard has struck a breakthrough deal with the mining industry over the controversial Resource Super Profits Tax (RSPT), bringing an end to the two-month-long dispute that had threatened the ruling Labor Party's re-election hopes. The new deal reached last night after days of negotiations between the mining companies and the government, significantly alters the proposed plan, introduced by the former Kevin Rudd administration this May. It offers major concessions to the mining industry, slashing both the rate and scope of the controversial mining tax. The revamped tax has received a warm welcome from the mining heavyweights, who had previously threatened to call off billions of dollars worth of planned projects. "The companies agree that the proposal presented by the government represents very significant progress towards a minerals taxation regime that satisfies the industry's core principle," BHP Billiton, Rio Tinto and Xstrata acknowledged in their joint statement. Xstrata also said it will recommence its Queensland mine expansion, put on hold after the unveiling of the original super tax.

Under the new deal, coal and iron ore miners will now be subject to 30%, instead of the pre-existing 40% tax. The tax will be applied on profits that exceed 12%, rather than 6% as planned before. A 40% levy will still apply to petroleum and gas operations under a separate Petroleum Resource Rent Tax, which will now cover not only onshore oil and gas projects but also offshore operations. The new deal also leaves only 320 companies eligible for the RSPT, in comparison to the previous 2,500 companies. According to the government, the revamped plan is expected to raise A$1.5 billion (US$1.27 dollars) less than the original proposal, which former prime minister Kevin Rudd believed would bring in A$9 billion a year in revenue.

Consensus Style Brings Results

The deal brings an end to a bitter two-month long battle between the former Rudd government and the mining industry over the RSPT. The mining tax was introduced as part of a wider reform of the Australian tax system aimed at spurring long-term economic growth while mitigating the fiscal risks associated with a rapidly aging population and rising welfare costs. Without it, Rudd said, Australia would not be able to undertake other potentially growth-enhancing moves such as lowering corporate income taxes for non-resource firms, encouraging savings and increasing infrastructure projects to reduce capacity constraints. Rudd's inflexible approach to opening the 40% rate for renegotiation prompted however the mining industry to launch a heavy lobbying campaign and anti-tax advertisements to shore up public opinion against the new tax, causing a sharp drop in Rudd's as well as his party's support to an all-time low since the 2007 federal election and a surprise replacement of Rudd by his deputy Julia Gillard.

In comparison to Rudd's authoritarian approach, Welsh-born Gillard's communicative, consensus style of politics is hailed as the main reason for the resolving of the impasse. In her inauguration speech, Gillard immediately pledged to reverse many of the policy decisions that had affected Rudd's popularity, and offered new negotiations to the mining industry. Following the unveiling of her new cabinet, Gillard also made the mining tax her policy priority, receiving approval from the mining companies.

Outlook and Implications

The watered-down deal is obviously intended to boost the ruling Labor Party's prospects in the upcoming general election, which must be held no later than April 2011. As it seems Gillard's consensus style and tone is already working, as highlighted by the most recent Newspoll earlier this week which found Gillard as the most preferred prime minister with 53% approval, while Liberal leader Tony Abbott's support plummeted 8% to 29%. The tax move, which is set to be warmly welcomed by the business community, is likely to boost these figures further and make it more plausible that Gillard calls an early election in the next couple of months.

As indicated by a hike in Australia's stock markets, that registered a 0.9% increase after the new mining tax was announced, the new deal is on its way to end the uncertainty for investment in the mining sector. It also eases many Australians' concerns that the RSPT would "kill" the mining boom and subsequently jeopardise thousands of jobs and citizens' pension plans that have been linked to the mining companies. Following the Rudd administration's proposal to impose a 40% profit-based tax, companies with Australian assets had taken a severe beating in the share market and a number of expansion projects were suspended.

However, the deal is not without its problems. The tax is still subject to Parliament's approval and to ensure the tax reform's passage the government needs Green support, against the opposition from the Liberal Party. The Greens have however warned previously that their support is based on the 40% tax rate, indicating that the ruling Labor party is likely to face a touch challenge to push the law if a possible early election does not bring a significant majority for Labor.