When Rudd eventually returned to the prime ministership in June 2013, Swan’s position was untenable. He resigned as deputy leader and declined to serve on the front bench.
Swan as Reformer
A treasurer must not only master the art of cyclical macro-economic management. They must also be an advocate for reform to ensure the economy is constantly improving. Swan did not lack courage when it came to reforms. He was willing to embrace difficult decisions that he knew would involve substantial political risks. His record of achievement when it comes to reform is mixed, but history may ultimately deliver a better judgement than the contemporary political debate has allowed. His two big reforms, the profit-based taxation of mining and a carbon price, have not stood the test of political durability, having both been repealed by the Abbott government. However, had Labor stayed in office longer, they would have become more entrenched and might have withstood a change of government—Medicare and superannuation, for example, were both implemented against a tirade of partisan opposition, but both became popular and entrenched. The execution of both changes was problematic, but they may act as a starting point for future reforms in these areas in much the same way that the repealed Medibank was the precursor to Medicare.
Swan’s record on reform is viewed differently from that of each of his contemporaries because it was of a different nature, reflecting his priorities as a politician and thinker. Previous treasurers, most notably Keating and Costello, had embraced reforms designed to improve economic efficiency, clearing the economy’s arteries of distortions and driving higher productivity. Swan’s priorities lay elsewhere, concerned as he was with engineering a more sustainable and equitable tax base, and preparing for a less carbon-intensive economy.
The beginning of the process that eventually yielded the Resource Super Profits Tax was not auspicious. Rudd had convened the Australia 2020 Summit, which, over two days in April 2008, brought together 1000 of the nation’s ‘best thinkers’ to brainstorm ideas for reform. The economics stream of the summit suggested a ‘root and branch’ review of the taxation system, to deal with the ad hoc nature of tax policy changes of recent times and to develop a more coherent tax system. Rudd embraced this idea, but Swan was not in the loop in relation to its announcement. Furthermore, an error was made in appointing Treasury secretary Henry to conduct the tax review. Henry is a brilliant economist and he was a fine public servant, but it is very difficult to have a review that is independent in reality and perception when it is conducted by a high-ranking official of the Treasury, which is an arm of the government.
Henry brought down a substantial and well-crafted report that contained 138 recommendations. One drew attention above all others: the implementation of a profits-based tax system for the mining sector. Treasury had recommended that the new government consider such a tax in its first Budget, but it was regarded as too big a reform for a government still settling into office to grapple with.
Minerals unearthed in Australia had for many years been taxed on the basis of the volume extracted rather than on the profits arising from their sale. The state-based royalties were inefficient and discouraged investment in more marginal projects. As the Minerals Council said in its submission to the Henry Inquiry: ‘There is a strong argument to reform the basis of determining royalty payments to a profits-based criteria from a revenue one … Royalties are a charge on the cost of doing business, hence could be struck on a capacity-to-pay basis as a share of profits.’28
The Henry Inquiry recommendation was a sensible one. A profits-based tax had the potential to make the tax system less distortionary (that is, have less of an impact on whether mining projects proceeded or not), make the tax system more stable and predictable (because a profits-based tax would be harder to unilaterally change than royalty rates, which states changed fairly routinely), and make more revenue for the Commonwealth. However, a number of errors were made that meant that none of these potential advancements were realised.
It is always better if a substantial report like that produced by the Henry Inquiry is released before the government formally responds, to allow consultation on the key recommendations. There was a natural-enough concern that the opposition would run a scare campaign about the government’s intention to adopt some of the more contentious recommendations. But it would have been better to rule some of these out while releasing the report, and then consulting on others. The government could have said that it wanted to consult with the mining sector and the states about how a profits-based tax would work in detail, and that it would implement a negotiated arrangement in its second term. This approach would have meant that the government would have avoided the unintended consequences and design difficulties that eventuated, and it could have claimed much higher moral ground on which to implement an election mandate.
The profits-based tax proposed by the mining industry was conceived to replace royalties, not to sit alongside them. The interaction of royalties and the super profits tax was to prove one of the most difficult elements of the proposed tax package. States could continue to increase royalties at will, a highly problematic element of the new regime.
