Late yesterday,the Senate Economics Committee released its report into why the Minerals Resource Rent Tax (MRRT) has failed to collect its projected revenues. It is a tale of subterfuge, ineptitude and corruption worthy of Wall Street. It is too long to excerpt but you must read Chapter 2: Explaining the Revenue Shortfall.
Bear in mind as you do that this is a Liberal Party controlled committee. Here are its conclusions. They fall into two categories, the first is how and why the tax went wrong which is spot on:
Committee View
2.110 The overwhelming evidence received by this inquiry confirms that the Prime Minister and the Treasurer have only got themselves to blame for the mining tax fiasco in general and the massive budget black hole from the MRRT in particular.
2.111 Back in June 2010, the MRRT was negotiated by a desperate government under pressure in the lead-up to a difficult election.
2.112 The government made significant concessions as part of its negotiations with BHP Billiton, Rio Tinto and Xstrata and failed to properly assess and cost the fiscal implications of those concessions.
2.113 Given the Gillard government’s long track record of incompetence, the immediate suspicion is that this is another case of mere government incompetence.
2.114 The truth however is likely to be much more sinister.
2.115 It is the considered view of this committee that the Gillard government was well aware that it had overestimated MRRT revenue and underestimated the fiscal impact of the concessions it made in its mining tax deal.
2.116 In the lead-up to the 2010 election the Prime Minister and the Treasurer had two main objectives. They wanted to get the ‘mining industry’ off their back and they didn’t want any costly concessions in any deal to undermine its pre-election narrative of an ‘early return to surplus’.
2.117 As such, it was very convenient for the Treasurer that he was able to rely on significant and to this day secret increases in commodity price assumptions, while turning a blind eye to the true fiscal cost of various key design features of the MRRT Heads of Agreement.
2.118 Why, for example, was the Treasurer so desperate to keep commodity price assumptions used to estimate MRRT revenue back in June 2010 secret?
2.119 It is also clear from the evidence to this committee, including evidence from Treasury itself, that the three miners who participated in the negotiations provided the government with their estimate of the likely combined market value to be used for the purposes of market value based depreciation arrangements.
2.120 Yet Treasury also indicates that the government was effectively flying blind on the fiscal implications of that key feature of the MRRT Heads of Agreement.
2.121 Incompetence or deliberate and convenient ignorance?
2.122 The committee does not even question the merit of the concessions made. What the committee does question is why the Gillard government did not properly cost the fiscal implications of those concessions before signing on the dotted line.
2.123 It is clear from the overwhelming weight of evidence, including from Treasury itself, that changes in commodity prices, production volumes, exchange rates and state royalties had already been factored into the progressively downgraded MRRT revenue estimates – all the way to the $2 billion MRRT revenue estimate for 2012/13 which was 50 per cent down on the original Swan MRRT forecast.
2.124 As such, the Prime Minister’s and the Treasurer’s repeated assertions that those factors were mainly to blame for revenue collections more than 90 per cent below the Treasurer’s official MRRT revenue estimates have been comprehensively discredited as the sort of dishonest spin that sadly we have come to expect from this Treasurer.
2.125 Any Chief Financial Officer of a publicly listed company would have long lost his or her job if they had come in more than 90 per cent below forecast on a key revenue item like this.
2.126 It is clear that the specific design features of the MRRT agreed to by a government in its negotiations with the three biggest miners in Australia are mainly to blame for the massive revenue shortfall compared to the Treasurer’s budget estimates.
Sadly, in my view, this is the most accurate explanation of what transpired in the creation of the MRRT that is on the public record.
But wait, there’s more. The second set of conclusions are about what to do now and are just as disgraceful for the Liberal Party:
2.127 The committee does not support any moves to limit the full crediting of state royalties or any changes to depreciation or netback arrangements.
2.128 Any such changes would make a bad tax worse. It would also again create further unnecessary uncertainty for one of Australia’s most important industries.
2.129 The Gillard government’s MRRT is a complex, distorting, inefficient, costly to administer, costly to comply with and unnecessary tax. Incredibly, it has not raised any meaningful revenue when the government has already spent all the money they thought it would raise and more.
2.130 Because of its complexity, inefficiency and increased cost of compliance, the MRRT is bad for investment in the mining industry and as such is bad for our economy. It is now abundantly clear that it is also bad for the federal budget, exposing it to unnecessary structural risks.
2.131 The inefficient and complex MRRT is unnecessary, because the mining industry already pays its fair share of tax. Indeed, the mining industry already pays more than $20 billion a year in federal and state taxes. It is not in our national interest for this important industry to be weighed down by a complex, inefficient and distorting tax which doesn’t even raise any meaningful revenue.
2.132 To the contrary, it is in our national interest to encourage increased investment in mining through competitive taxation and regulatory arrangements so mining remains strong and can continue to make a significant contribution to both our national prosperity and government revenue.
2.133 For all these reasons (and other reasons outlined in subsequent chapters), it is the committee’s very strong view that the Minerals Resource Rent Tax should be abolished immediately.
2.134 In fact, confronted with the obvious failure of the MRRT, any federal government committed to our national interest would long have taken action to remove this bad tax.
This is codswallop. A functional resource rent tax does not distort investment decisions. It takes higher cuts of tax once commercial rates of return are met. Moreover, the Coalition Committee is effectively arguing that a failed tax that collects no revenue is distorting investment decisions. This is not only absurd it is quite obviously misleading unless we are to conclude that the LNP Senators have IQs under 50.
As the Coalition attack on budget deficits reaches hysterical proportions, it is breathtakingly irresponsible to conclude the tax should be scrapped. It should be fixed. Take a look at the terms of trade and tell me commodity prices are not still extraordinary.
As such, the Liberal Party is now guilty of the very same crime it rightly condemns Labor for at the last election.
I’ve followed this story for five years and am not easily shocked. But this Senate report does it. It tells an extraordinary tale of how deeply big mining has corrupted both Australian political parties. Not through money, but through their need for power at any price.
Any chance of Australia extracting enduring value from a once in a 150 year windfall if gone. This is a Banana Republic in action.
