Abbott Delays Budget Savings to Scrap Australia Mining Tax

Sep 02, 2014 5:44 pm ET

(Updates with Cormann comment in 10th paragraph.)

Sept. 3 (Bloomberg) -- Australian Prime Minister Tony Abbott was forced to delay A$6.5 billion ($6 billion) of budget savings in order to meet his election pledge to repeal the nation’s mining tax.

The Liberal-National coalition won the support of key independent lawmakers to scrap the 30 percent levy on iron-ore and coal profits, only after agreeing to keep some spending measures financed by the tax until after the next election.

“By giving away some of its spending cuts in a tight budget climate it’s a bit of a Pyrrhic victory,” said John Warhurst, a political analyst at the Australian National University in Canberra.

The compromise highlights Abbott’s struggle to rein in a budget deficit estimated to have swollen to A$49.9 billion in the year ended June 30. Without a majority in the upper house, his government is forced to negotiate with a disparate group of lawmakers, ranging from the Australian Motoring Enthusiast Party to mining magnate Clive Palmer’s bloc of three Senators.

Abbott has derided the mining levy, introduced by the previous Labor government in July 2012, as one of the most “stupid” taxes ever created. Treasurer Joe Hockey told parliament yesterday it had raised about 1 percent of what Labor had forecast.

‘Positive Step’

Rio Tinto Group, the world’s second-largest mining company, welcomed the repeal of the tax, saying in a statement yesterday it would be “a positive step for investment and good for jobs in the mining sector.”

The government’s repeal bill was previously rejected in the upper house, as the legislation also sought to scrap more than A$16 billion of spending over the forward estimates, including payments to parents of school children. Under the compromise reached yesterday, the government will save A$10 billion over the forward estimates, Hockey said in a statement.

The schoolkids bonus will stay until the end of 2016, as will an income support bonus, while a low-income superannuation contribution will stay until the end of June 2017.

The government will recover some of the reduction in savings by delaying an increase in compulsory pension contributions by employers. The rate will be paused at 9.5 percent of employees’ salaries until July 2021 and will increase 0.5 percent each year until it reaches 12 percent from July 2025.

The agreement was the “best possible deal in the national interest,” Finance Minister Mathias Cormann told Sky News today. “It helps us repair the budget.”

Election Pledges

The repeal of the mining tax comes after Abbott fulfilled a pledge to scrap the nation’s price on carbon in July. The government says it’s made significant progress on another core election promise in “stopping the boats” operated by people smugglers that bring asylum seekers to Australia.

“If want a stronger economy we’ve got to have stronger budget,” Abbott told parliament in Canberra yesterday. “That’s exactly what we will have as a result of the changes that have passed through the Senate.”

The 30 percent mining tax was designed by former Prime Minister Julia Gillard after she ousted her predecessor Kevin Rudd in a Labor party coup. Rudd had proposed a 40 percent tax on all mining profits, including gold, nickel and uranium.