The big barons of the mining industry have claimed a huge scalp – Kevin Rudd, till yesterday the prime minister of Australia.

His successor, Julia Gillard, may turn out to be no more sympathetic to BHP, Rio Tinto, Xstrata, Fortescue and the other mining giants, local and international who have been waging a huge campaign backed by vast sums of money and a media curiously uncritical of the mining lobby against a government proposal for extra taxation on mining company profits.

But that campaign has been extraordinarily successful in vilifying Rudd who in a short time frame has gone from being hugely popular to being disapproved by 55 percent of Australians, according to opinion polls.

The proposal to tax at 40 percent "super" profits of the miners – profits above a base level above the government's cost of funds – was certainly crude in its application and appalling in its presentation. It met instant opposition not just from the mining lobby which successfully scared millions into believing that there would be a mass exodus of mining investment from Australia to locations such as Canada but from those states, notably Western Australia, most reliant on mining.

Suddenly the Labor party was seen to be vulnerable with elections looming in the not too distant future. Fear combined with personal dislikes by many Labor ministers and parliamentarians of the often arrogant, nerdish, workaholic Rudd made him suddenly vulnerable. Gillard was presented with the prime minister's job on a plate by her colleagues, even including Treasurer Wayne Swan, an old mate of Rudd from way back.

Rudd had earlier lost ground because of his retreat from a carbon trading scheme that he had long promoted as Australia's contribution to reducing carbon emissions – Australia is one of the highest per capita emitters in the world, as well as selling vast quantities of polluting coal to China and elsewhere.

But at the end of the day it was the miners' onslaught which did the most damage. In reality there is a strong argument for higher taxation on depleting natural resources which have been hugely profitable in recent years because of the escalation in prices due to prior low investment coupled with the surge in demand from China and other fast growing economies. A new tax was in principle among various proposals from a tax review panel chaired by Ken Henry, secretary of the Treasury department, which reported earlier this year.

From a macroeconomic perspective, Australia might be best advised to focus on developing skill intensive industries rather than shipping untreated raw materials around the world. The mining boom has contributed to a lopsided economy where the major population centers have become over-reliant on government stimulus measures and the currency has risen to levels which leave many outside the mining industry unable to compete. Many industries outside the mining sector welcomed the Rudd proposals.

Meanwhile despite these riches Australia continues to accumulate foreign debt at a troubling rate – now some 53 percent of gross domestic product, a level only surpassed by the likes of small economies like Greece and New Zealand.

The instant reaction of a market obsessed with mining has been for the Australian dollar as well as share prices of BHP et al to rise.

But slightly long-term markets may begin to look more closely at the fundamentals of this economy and ask themselves two questions:

1. Whether the surge of mining investment, now set to resume after various cancellations, actual or rhetorical, will set the stage for a minerals price bust such as seen a decade ago. Chinese demand will not grow exponentially forever.

2. Whether sustained over-valuation of the Aussie dollar and sustained over-borrowing by Australian households is not setting the stage for a currency collapse back to 65 US cents or even the 48 cents of 2002 but also a crisis for Aussie banks. They escaped the last big banking bust because they were not big players in New York/London derivatives. But large chunks of their loans to highly indebted Australian households are funded not from domestic deposits but wholesale offshore borrowing.

We repeat our warning of a few weeks ago. Judge Australia not by its mineral wealth but its level of household debt.