Could this be the biggest con job ever visited on the Australian public?
Forget Ern Malley, the campaign waged by the mining companies against the original mining tax emerges as Australia’s most costly national swindle, both in terms of the cost of the heist – $22 million for a six-week television advertising campaign – and the continuing hit to budget coffers – $60.5 billion in revenue lost over 10 years.
To put that in perspective, for every dollar the mining lobby spent fighting the tax with emotive ads, featuring wholesome-looking miners, it saved another $2750.
But far from cutting back on investments, BHP Billiton this week revealed its true intentions. In fact it plans to invest an additional $80 billion over the next five years, mainly in Australia, to expand its production capacity, despite the proposed, watered-down, mining tax.
Sure, this sum could have been even bigger if there were no tax at all, but $80 billion is still a substantial investment program, particularly in an economy running at close to full capacity.
To put that in perspective again, BHP Billiton will be spending more each year on new mines and equipment than the federal government will spend on the nation’s primary and secondary schools (about $14 billion a year).
How did we let ourselves be convinced taxing miners’ ”super profits” would force them to walk away from some of the world’s richest resource deposits? That so-called sovereign risk concerns would forever deter foreign investment in Australia? That is now the $60.5 billion question.
It is all too easy, albeit appropriate, to blame politicians. Tony Abbott opposed the tax to feed his ”great big new tax” scare campaign. Kevin Rudd failed to consult the mining industry and then failed to sell the need for the tax to an uncertain public. The fledgling Prime Minister Julia Gillard caved in to the mining industry in an attempt to ”clear the decks” of a policy and electoral headache.
Nor should it be a surprise that the mining companies decided to fight tooth and nail against the tax. Their obligations to shareholders all but demanded it. But why did ordinary Australians shun the tax? As collective owners of the rich iron ore and coal deposits we stand on, why was it so easy for the mining industry to convince us the tax was a dud?
I suspect it was because, fundamentally, the original super profits tax was too complex to understand. Which is not to say it was a bad tax; it wasn’t. Just that it involved mastery of a few theoretical arguments, like uplift rates and the present value of future tax concessions. It was structured so that the government in effect became a silent venture partner with miners, taxing them more heavily in good times, but granting them concessions in bad times. Theoretically pure, but hard to understand without an economics degree.
The price of our ignorance is now abundantly clear, with Treasury’s estimates that the new tax will raise just $3 billion a year towards the second half of this decade, down from $10 billion plus in the original design. Of course, these are just projections. They depend on a number of factors including commodity prices and movements in the Australian dollar. But the loss will be substantial.
Having walked away from billions of dollars, perhaps the best we can hope for now is that we get the $40 billion the new mining tax is forecast to raise.
The resource super profits tax was a good tax. But so is the mineral resources rent tax, for a host of reasons.
Firstly, it meets a fundamental principle of good tax design, that you should tax most heavily the things that can’t move, so you don’t create incentives for tax avoidance. It’s why broad-based consumption taxes, such as the GST, are good, and transaction taxes, such as stamp duties, are bad.
What could be more immoveable than minerals buried hundreds of metres below the ground?
Secondly, it continues, albeit somewhat less effectively, the idea of replacing state-based royalties, which tax miners as heavily in bad times as in good, deterring investment in some riskier projects with long lead-in times.
The new mineral resources rent tax also satisfies the criteria that it only kicks in when miners are earning a ”super-normal” profit, that is those above a certain deemed commercial rate of return.
Importantly, taxing the super-profitable mining industry also has benefits for the wider economy. By capturing a greater share of profits, (assuming the money is saved, not spent) it helps to take some of the heat out of a strong economy, easing pressure on inflation.
In a speech this month, a senior Treasury official, David Gruen, predicted rising living standards in China and India would continue to power the Australian economy for years to come. Rising urbanisation means rising demand for the metals and minerals needed to build roads, railways, homes and appliances, everything a modern Chinese or Indian family could want.
”China and India should continue strong catch-up growth for at least a few more decades – and certainly for the next 15 years,” Dr Gruen says.
By keeping interest rates lower than otherwise would have been the case and easing upward pressure on the dollar, taxing mining can also help to even up the two-speed economy.
Make no mistake, manufacturing is still likely to decline in relative terms as mining booms, but higher taxes from mining can be spent on helping some people adjust to new careers, new lives.
But there remains considerable political work to do before even the new version of the mining tax passes Parliament, ready for its proposed start date of July next year.
Mining companies are threatening all-out war again if Gillard does not agree to reimburse them all future state royalty increases. But to do so would be to write a blank cheque to state governments to increase royalties, potentially eating up a large portion of the revenue raised through the mining tax.
BHP’s record profit suggests it is mining companies that should shoulder the risk of higher royalties, not taxpayers.
Fool me once, shame on you; fool me twice, shame on me.