Rudd's Election Gamble Backfires as Australia Resource Tax Aids Opposition

Australian Prime Minister Kevin Rudd’s proposal to collect more tax from mining companies is shaping up to be an election-winning strategy. Just not for him.

Rudd’s Labor party trailed the opposition Liberal-National coalition for the first time in four years, according to a Nielsen opinion poll released yesterday. Faced with intense criticism from BHP Billiton Ltd. and Rio Tinto Group, Rudd invoked powers normally reserved for national emergencies to buy advertising to defend the levy, which he says will help pay for wider tax cuts and improved health care.

“To introduce a new tax, particularly one which becomes controversial, in an election year, is bad politics,” said Ian McAllister, a professor at Australian National University in Canberra. “An election fought on tax would favor the coalition because they’re generally seen as the better economic managers.”

Industry groups say the tax would force companies to shift operations overseas, jeopardizing investment in a business that represents about 10 percent of the A$1.2 trillion ($980 billion) economy. The proposed levy “makes Australian mining a tougher prospect,” BHP said today in a full-page ad in the Australian Financial Review newspaper.

Rudd, who must hold an election within 10 months, saw his public support start to slip in April when he scrapped a plan to implement carbon trading, a key part of a campaign pledge to fight global warming. His popularity dropped further after the mining tax was announced May 2, retreating to 41 percent from 60 percent two months ago, the Nielsen survey showed.

‘Patchwork Quilt’

The plan, which would take effect in 2012, aims to collect more tax from resources companies benefiting from surging demand in India and China. Instead of what Rudd has described as a “patchwork quilt” of state levies, the government would tax returns above six percent at a 40 percent rate.

The overhaul is needed to boost spending on health care and secure retirement benefits as society ages, Rudd has said. It would provide tax breaks for 2.4 million small businesses and reduce the corporate rate to 28 percent from 30 percent by 2014 to stimulate growth.

Rudd has acknowledged the government’s intent to address demographic changes has been lost in the backlash. One quarter of a projected population of 36 million will be aged 65 or over by 2050, according to government estimates.

‘Tough Debate’

“This will be a tough debate,” Rudd said today in comments broadcast on 2UE radio.

The Nielsen poll found that 53 percent of voters preferred the opposition compared with 47 percent who backed Rudd’s party. The survey of 1,400 people contacted between June 3 and June 5 had a margin of error of 2.6 percentage points.

The coalition now led by Tony Abbott had trailed in polls since Rudd became leader in 2006, before taking power in the November 2007 election. Abbott became opposition leader six months ago.

“The more people learn about this tax, the more they understand that it’s a dagger aimed at the heart of our prosperity,” Abbott told reporters in Sydney today. “He shouldn’t just change it, he should dump it,” he said of Rudd.

The initial winner in the spat over the tax, which would take effect from 2012, has been the advertizing industry. Melbourne-based Shannon’s Way is handling the government’s A$38.5 million newspaper, radio and TV campaign.

‘Share Wealth’

One television commercial shows a man in a classroom explaining that for Australians to have a secure retirement the tax system must be overhauled. Taxes must be simplified and cut for small businesses while ensuring that “all Australians share the wealth of our natural resources,” he says.

Badjar Ogilvy, a unit of STW Communications Group Ltd. is handling the Minerals Council of Australia’s counter campaign. That effort began five days after the tax was announced with full-page newspaper ads, YouTube clips and television spots.

“Billions of dollars of investment are already on hold,” one council television advertisement reported. “Who will be hurt by this super tax? Everyone,” the ad says, warning of job losses and lower returns for pension funds.

Funding for the commercials comes from companies, council spokesman Ben Mitchell said, declining to say how much is being spent. “But it is less than the government and it is not taxpayer money,” he said.

In Western Australia, which accounts for 62 percent of the nation’s mineral production and 73 percent of natural gas output, the Liberal party has started a “fighting fund” to unseat federal lawmakers from the Labor party, state director Ben Morton said.

‘Comrade Kevin’

A separate campaign by a group of 220 West Australian-based miners released a radio ad in which a miner described as Russian thanks “Comrade Kevin” for imposing a tax that will encourage companies to invest in his country rather than Australia, according to the Australian Associated Press.

The clash centers on the targeting of a “super” profit, or returns above the long-term Australian government bond rate of about 6 percent. The nation’s petroleum resource rent tax, also levied on profits at a rate of 40 percent and in place since July 1987, only takes effect when returns exceed 11 percent.

Rio Tinto Managing Director for Australia David Peever said May 20 the company is reviewing all of its investment decisions because of the tax. BHP is reassessing its Yeelirrie uranium project in Western Australia, the project’s general manager, Andrew Shook, said last month.

Work Suspended

Xstrata Plc, based in Zug, Switzerland, said June 3 that A$586 million of work expanding the Ernest Henry copper mine and the A$6 billion Wandoan coal project in Queensland aren’t viable under the new tax. It was the first company to suspend major work because of Rudd’s planned levy.

The new tax “doesn’t stop any current mine or proposed mine being profitable for its investors,” said Tony Maher, national president of the Construction, Forestry, Mining and Energy Union. “Of course the big multinationals are protesting.”

To contact the reporters on this story: Marion Rae in Canberra at mrae3@bloomberg.net; Gemma Daley at gdaley@bloomberg.net

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