From The Australia Institute:
Western Australia’s National Party leader, Brendon Grylls, has proposed increasing the existing ‘mining lease rental’ on iron ore production in the state from $0.25 to $5 per tonne. It would apply only to mines that are more than 15 years old.
Ideally mining production would be taxed with a well-designed tax on economic rent, rather than a “flat tax” such as the $5 per tonne proposal. A tax on rent is less likely to affect companies’ behaviour as it is levied only on profits rather than production.
However, because of the low-cost of production in these mines the proposed levy will effectively work as a resource rent tax. WA Treasury is expecting iron ore prices of between $US47-54 out to 2020. This is substantially higher than the average per tonne costs of these mines, which range from $US15-20, according to the main miners; Rio Tinto and BHP Billiton.
The key point is that the mines affected by the levy will not have any incentive to change their behaviour as their costs are much lower than the prices they receive for their iron ore. Because the increased levy would give no incentive to reduce production, it is unlikely to lead to any reduction of employment in Pilbara mining. This levy would raise around $2.8 billion per year. If the higher levy had been imposed on relevant production over the last five years it would have raised $11.5 billion.
The increase in WA government revenue is likely to lead to an increase in employment across the state. If the increased revenue was all spent on construction of new infrastructure, we estimate an increase of 4,600 jobs.
Economic modelling commissioned by the Minerals Council of Australia suggests large reductions in employment of 2,900 in the Pilbara and 7,200 nationally. However, as the report admits, a cost increase would only affect mining decisions in the old mines in the ‘long run’ as they approach the end of their lives. Prior to that there is more than enough ‘fat’ to share with government and would act much like a tax on rent.
Deloitte’s modelling results are presented as if they applied now whereas a full reading of the report indicates that the results only apply in the long run and not the near future when the levy would ‘mimic’ [Deloitte’s word] a profit or rent tax. When and if the old mines become marginal there is more than enough time for a government to change the tax arrangements if it so wishes.
Deloitte’s remaining argument is that the impact of the levy on GST distributions to WA is expected to reduce the net contribution of the iron ore levy change to less than $300 million per year. That is certainly not clear from a reading of the rules for GST distributions and Deloitte notes there are two strong points WA could use to argue against any reduction in GST The Australia Institute 2 receipts. While this is important for WA stakeholders, from a national perspective there is a clear revenue gain to Australian governments.
In conclusion, the proposal to increase the WA iron ore levy should be supported as a pragmatic alternative to a resource rent tax. It will not have any effect on iron ore production in the short or medium term. It will raise significant revenue for governments which can invest in badly needed infrastructure projects.
All true. Though I do not support spending the money. The main reason for the tax is inter-generational equity given the dirt is a fixed endowment being depleted so the takings should be preserved for future generations. Political pork does not qualify.
More support from Ian Verrender at the ABC:
They are the sounds that each year conjure up fond memories of lazy, childhood holidays and the onset of an Australian summer.
The gentle rustle of a nor’east wind, the low, droning hum of cicadas, the thwack of leather on willow … and the anguished cry of a treasurer from his Canberra office as he faces the prospect of a mid-year downgrade to his economic forecasts.
It has become something of a tradition.
Each year around early December, the treasurer rakes over the books, desperate to extract some kind of redeeming argument to explain just why things haven’t quite gone as expected.
Wayne Swan was caught by an unexpected drop in capital gains tax receipts and a sudden cut in corporate tax revenue in the aftermath of the financial crisis.
Joe Hockey was belted by the savage downturn in commodity prices and a collapse in nominal GDP.
And now Scott Morrison has been thumped by the weakest growth in wages since the last recession.
Notice the pattern? In each case, revenue expectations from just a few months earlier have taken a pounding.
And while spending cuts may form part of a solution, it is time for a slightly more nuanced debate from those running the show.
It’s time they sought out some new revenue streams or, at the very least, plugged some of the leakages if we are ever to achieve some kind of fiscal balance.
For years, successive treasurers have overcooked expectations in the May budget.
A return to “trend” economic growth — about 3.5 per cent — is always just around the corner.
And with those higher profits and higher wages, the tax dollars will roll in and, presto, there’s your deficit done and dusted.
Since 2010, however, real GDP growth has only ever spiked above 3 per cent on a couple of occasions, the longest being for about a year between mid-2011 and mid-2012, leaving many to question whether previous growth patterns will ever return.
The forever forecast budget surplus — first due in 2010 — has since been pushed out into the next decade, and there is every chance that Morrison will need to further delay its return when he hands down his Mid-Year Economic and Fiscal Outlook (MYEFO) on December 19.
That alone would be embarrassment enough.
But the MYEFO statement is likely to come hard on the heels of our latest growth figures, due on Wednesday, which – if they’re not one of the weakest growth quarters in the past 25 years – could show a contraction.
National Australia Bank, Nomura Australia and Morgan Stanley all believe the economy went into reverse in the September quarter, slipping by as much as 0.3 per cent.
So much for jobs and growth.
Two consecutive quarters of contraction equals recession.
While few economists are forecasting a December quarter disaster to take it to two in a row, it’s pretty clear that 2017 looms as a difficult year for the Lucky Country.
The sudden decline in fortunes follows a savage drop in business investment during the September quarter on top of surprisingly weak dwelling construction data.
Given the mining boom has some way to run and the housing boom is at or near its peak, that doesn’t augur well for the future. And that potentially puts the Treasurer in a bind.
For if the economy does take a turn for the worse, the pressure will be on to loosen the purse strings, a policy the Coalition avoids like leprosy.
There’s little help coming from the Reserve Bank. With rates already at record lows, it has little ammunition left.
And given the stratospheric cost of housing and the mountain of debt building up at a household level, it’s reluctant to pull the interest rate trigger.
With Donald Trump now in the White House and promising a massive injection of cash into the US economy via a radical infrastructure program, Australia remains one of the few developed economies left pursuing a contractionary fiscal policy; not really a wise move when your economy is running out of puff.
So how could the Prime Minister and his Treasurer maintain the goal of eliminating the deficit while stimulating the economy? It’s not rocket science.
There is a growing chorus within the Coalition at state levels to wind back negative gearing and capital gains tax discounts.
As NSW Planning Minister Rob Stokes argued, why should investors get a tax reward for buying a second or third property when first home buyers receive nothing?
True, the PM and Treasurer went hard against the ALP’s planned wind-back at the election. But when it comes to backflips, they’ve proven themselves more than capable.
The Grattan Institute’s John Daley reckons the Government could save itself around $5.3 billion a year by tightening up on these two measures.
Then there is superannuation.
The Treasurer outlined a series of excellent policy measures in the May budget, only to be shot down by his own party during the election campaign at a vast cost to the budget.
But perhaps it’s time to revisit the broader question of our resources rent taxes.
The Coalition, under Tony Abbott, symbolically buried the mining tax. But it didn’t really die.
The West Australian Government merely grabbed the cash after 2010 by hiking state royalties to extraordinary levels to ensure the federal tax didn’t work.
When the mining tax was removed, WA kept the exorbitant royalties in place, infuriating the mining industry and ensuring its GST take would be slashed.
And now, to make up for the GST loss, Nationals leader Brendan Grylls has proposed a further tax, which would only exacerbate the state’s GST problem.
After revelations last week that the takings from the Petroleum Resources Rent Tax had halved since 2012/13 to around $800 million — the period during which Australia became the world’s biggest exporter of natural gas — the Treasurer sensibly ordered an urgent review.
While he’s at it, he should take a good look at the WA debacle and some kind of uniformity on resources taxes.
Why is energy subject to a resources tax, but minerals are not?
With a federal minerals resources rent tax in place — one that worked properly — WA could be given cash without harming its GST share and the federal deficit could be reined in.
Even when prices plunged earlier this year, the big iron ore miners were making a killing with a 50 per cent profit margin. That’s now around 200 per cent.
These are non renewable resources that don’t belong to the likes of BHP or Rio Tinto. They belong to ordinary Australians.
It’s revenue that is being shipped out of the country to investors offshore. And it’s why domestic spending is being targeted by a cash-strapped Government.
There is really is NO valid argument against higher taxes for BHP’s and RIO’s iron ore rents.
