Living in fear of a Rudd bombshell

More than $500 million was wiped from McMillan Shakespeare's value after an unflagged announcement from the Rudd government. Companies may wonder: 'who's next?'

One only has to look at what happened to McMillan Shakespeare yesterday to recognise how dangerous and potentially destructive this phoney election campaign period could be.

McMillan Shakespeare shares were smashed, wiping more than $500 million of the salary packaging company’s market capitalisation after it came out of a suspension of trading triggered by the Rudd government’s announcement that it would change the law relating to the treatment of fringe benefits tax on motor vehicles.

Unless Kevin Rudd recalls parliament before the election that announcement, driven by the need to fund his decision to switch from the carbon tax to an emission trading scheme a year ahead of schedule, is purely an election promise which may or may not ultimately become law, depending on the outcome of the election and whether or not, should Labor win, it changes its mind after experiencing the industry’s reaction.

The difficulty for McMillan Shakespeare and its shareholders, of course, is that the announcement of the FBT changes came from the government and therefore appears to have far more credibility and certainty than if, for instance, it was an election promise from the Opposition – even if in a practical sense there is no difference unless Parliament is recalled.

Other companies, and individuals, will be looking at what has happened to McMillan Shakespeare, and the destructive ripples of uncertainty flowing through the automotive sector, and be concerned about what might come next as the government searches desperately for more revenue and more spending cuts to fill a widening hole in the nation’s finances.

They’ll be aware that Rudd has "form" and that the foreshadowed changes to the FBT regime, which came without any prior consultation or warning, fit a pattern of behaviour.

The most obvious earlier instances of Rudd dropping bombshells on unsuspecting and unprepared targets were the unveiling of the national broadband network policy and the original Resource Super Profits Tax.

The $44 billion-plus NBN, dreamed up on a plane trip by Rudd and Stephen Conroy, included a threat to destroy Telstra unless it "co-operated" and could have done untold damage to Telstra shareholders had their board not refused to be stared down by Conroy and ultimately negotiated a very substantial package of compensation. That policy, uncosted or analysed, came out of the blue.

The RSPT, the one recommendation plucked from the 138 recommendations made by the Henry tax review, was also unloaded on the resource sector without consultation or warning, precipitating a backlash from the sector that ultimately helped force Rudd out of the prime ministership the first time.

While it is understandable that every decision the government makes in the lead up to the election has to be framed within a political context, it is incumbent on Labor to use its incumbency responsibly and to recognise that its pronouncements have more force than mere promises during a formal campaign period.

Chris Bowen has impressed with his grasp of the treasurer’s role and realistic evaluations of the state of the economy and the challenges facing it. It is to be hoped that he also understands that his every word has potentially destructive real-world impacts regardless of whether the initiatives are ever implemented.

The statutory method for calculating the FBT on employer-provided vehicles had been around for three decades, had been reviewed by the Henry tax review and had been reconfirmed by this government as recently as 2011.

Regardless of the merits or otherwise of changing the treatment, it shouldn’t have been changed without some process that enabled the industries affected to put a case and, if the government still went ahead, to prepare themselves, their employees and their shareholders for the change.

Businesses across the economy, and individuals, will be looking at what happened to McMillan Shakespeare, in the knowledge of the earlier NBN and RSPT episodes, in the knowledge that Rudd and Bowen have yet to explain how they will fund the apparently uncosted but inevitably extremely expensive 'PNG solution' to halting the tide of asylum seekers at a time when it appears government revenues are falling away.

In such an unpredictable but threatening environment the obvious response will be to behave defensively, which isn’t going to be a positive for confidence and the economy.

These are unusual circumstances but, while the government is still supposed to be governing rather than in caretaker mode, it needs to behave like a government and follow proper process, with due regard to the implications of its pronouncements – or else call the election.

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