Rudd loses grip on reality
Kevin Rudd's reliance on economic modelling to justify his resource super profits tax (RSP'I) is ironic. Only a year ago he was blaming economic modelling for causing the global financial crisis. The prime minister complained about "neo- liberals" and their belief in the "efficient-market hypothesis".
Here's what he said: " ... neo-liberals were so convinced of the ideological righteousness of their cause ... they refused even to recognise the severity of the problems that emerged". And, for good measure, "the problems did not fit the model, so the evidence was simply discarded".
Well. The ideological righteousness with which the PM is pursuing his RSPT easily matches the zeal of any neo-liberal And when miners and investors raise problems with the modelling upon which the RSPT is based, their evidence is ignored.
It seems Rudd has no qualms about theoretical models when it's social democrats instead of neo-liberals doing the modelling. The alleged benefits of the RSPT are benefits that are entirely the product of the assumptions that Treasury has used to construct the tax. That's because the RSPT is the first tax of its kind in the world.
The post-budget speech that Treasury secretary Ken Henry delivered last week is revealing. For 15 minutes he passionately defended the RSPT - but not once did he refer to any actual examples or practical experience. Henry's defence of the RSPT was entirely theoretical. The evidence he relied on was a set of invented case studies. The closest real-world parallel to the RSPT is Australia's petroleum resource rent tax - but the secretary went out of his way to say that the two tax regimes were '"very different". (Which means, incidentally, the PM is wrong when he says the Northwest
Shelf which came into being under a petroleum resource rent tax is proof that resource companies can accommodate the RSPT.)
The RSPT might be nice and tidy in a theoretical sense or, as Ross Garnaut put it, it's "elegant", but it is completely unproven. Maybe there's a reason the . RSPT hasn't been tried anywhere else: maybe it's because the RSPT doesn't work.
Rudd is doing what he accused neoliberals of doing. Evidence that doesn't fit the Treasury model is discarded. Critics of the tax are accused of scaremongering. The consultation process over the tax is a sham because negotiation about the essential features of the tax has been ruled out.
The government will brook no opposition to the RSPT. And nor, it seems, will Henry. The Treasury secretary referred to complaints such as that the RSPT didn't take account of the rate of return required for risky resource investments.
In response, Henry simply said: "All of these statements are incorrect". But how would he know? The tax hasn't been implemented yet. The only thing the Treasury secretary can rely on is his theory. And a theory is only as good as its assumptions. Unfortunately for Rudd and his treasurer many of the assumptions behind the RSPT are completely unrealistic, and in some
cases absolutely naive.
An alleged benefit of the RSPT is that investors will gain what is in effect a risk-free asset in the form of a tax credit guaranteed by the government to have a present value of 40 per cent of their initial investment. But for this credit to have any economic value, investors and those who lend to investors have to believe that the government will at some future date honour the credit.
Of course there's always a risk that legal and tax regimes change over the life of a project - it's called sovereign risk. But the difference under the RSPT compared with existing schemes is that the potential for government decisions to affect the viability of the project is much greater because the government is underwriting 40 per cent of the project.
The time line for resource projects is in the decades. Most governments can't keep their hands off the tax laws for more than a few months. The Rudd government didn't even wait until its second term to grab what it thought was its fair share of resource company profits. Anyone who believes that Australian governments understand that long-term investments require long-term certainty should look at the way superannuation has been regulated.
The RSPT might be satisfying as an academic econometric exercise but, as Kevin Rudd and Wayne Swan are discovering, the spreadsheet calculations of Treasury boffins don't reflect what happens in the real world.