Rudd's rent tax concussion

I had to pinch myself this morning. Here was an Australian Prime Minister saying that a major coal investment by Xstrata wasn't mothballed by his mining tax but rather it would have happened anyway. Kevin Rudd obviously does not understand the devastation his tax is having on mining investment in Australia. He does not appear to know that there are at least 100 major project mothballings to come. What's holding up the mothballing is that the miners still can't believe the Rudd-Swan tax is going to end up being as silly as the current proposal. They are holding their fire and, as I explain below, they may be right.

Meanwhile, the residents of Western Australian understand the impact of the tax on their state, and according to market research firm Roy Morgan, the ALP could lose all of its seats in WA (see RSPT shockwaves spread, June 1). Queenslanders took longer to understand the impact of the proposed tax because Premier Anna Bligh did not point out what Rudd and Swan were doing to Queensland. But Queenslanders are now getting the message and there is every reason to believe that, in time, the Queensland political outcome will be similar to WA.

But it gets worse – far worse. Rudd and Swan have made all exploration in Australia, apart from exploration around an existing mine, uneconomic and as a result that sort of work will be stopped. Thousands of geologists will have to find other work or, more likely, move to other countries. I am not exaggerating.

Why this is more serious than the mine closures is that eventually Australians will elect a government that understands mining and the mothballed projects will be re-started. But once the exploration pipeline has been shut, no new projects will come forward. Rudd and Swan are devastating the wealth of future generations.

To understand how this works, one needs to look at the impact of the petroleum resources tax. I have always hailed that tax – which was introduced in 1987 – as a model of how mining should be taxed. Unlike the Rudd-Swan plan, it assumed a 15 per cent return-on-investment and was not retrospective. It did not stop the vast developments on the North West Shelf, and that's why the tax has been hailed as a success.

But at the time of the tax, major mining giants from all around the world were looking for oil and gas around Australia. One by one they quietly ended their exploration and went elsewhere. There was no fanfare. Almost a quarter of a century later, Resources Minister Martin Ferguson last week revealed that we now have a national trade deficit in crude oil, refined products and LPG of $16 billion a year, heading for $30 billion by 2015 (see Australia's oil deficit blow-out, May 31).

Journalists like me have let the country down because we did not pick up this impact.

In a bizarre twist of fate, Kevin Rudd in his campaign to be Prime Minister actually did pick up the problem and promised to give Australians a tax deduction for shares taken up in mining exploration companies where the money was spent on exploration. That measure was brilliant and would have given exploration a huge boost.

But, when the Rudd government came to power, Kevin Rudd and Wayne Swan were 'snowed' by Treasury and handed it across to the Henry tax review. And, of course, Henry's people thought it was a silly idea and replaced with a scheme where the rebates would go into the exploration company. Mathematically, it was quite clever – as is the mining tax. But, in practice it will have limited value and, when combined with the mining tax, most mineral exploration in Australia will cease.

Who could have conceived when we elected Rudd and Swan into power this is what they would do?

The exploration suspension is more devastating than the mine project mothballing but – like the petroleum situation – it will not make headlines. Meanwhile, Rudd and Swan will need to repeat their lines that various projects were not mothballed by the mining tax many times.

Our Prime Minister and Treasurer are not fools and I believe in time they will listen to people such as Rod Eddington (see Our loss is Africa's gain, June 1) and Future Fund chief David Murray who appears in KGB TV today.

Before they came to office, Rudd and Swan listened to miners and devised a way to boost exploration. They have simply got bad advice from Treasury and believed it. I believe that eventually they will wake up and take Rod Eddington's advice and start again on the mining tax structure in the national interest. But let's hope it's not too little too late.