Monday, June 28, 2010

It's time for mining companies to stop bleating and start negotiating

Let's get one thing straight, mining companies making profits from assets owned by the Australian people should pay more tax. The profits made by mining companies are huge and Australia needs to redistribute this wealth across Australia so that we can develop a more diversified economy. There's no doubt at all that cutting the company tax rate by 2 per cent to 28 per cent and increasing the level of super to 12 per cent are good ideas that will be paid for by increased resource rent.

There's also no doubt that this country is a rich one primarily because we have redistributed wealth generated by our resource wealth - mostly agricultural until the 1960s - across Australian society throughout our history. Such redistribution should perhaps have been more extensive and governments could also have used it to build a more competitive, less insular, manufacturing sector. Nevertheless it is Australia’s ability to adapt – though often imperfect – over time to vulnerabilities that have allowed it to be in a position today to respond effectively to new vulnerabilities.

Up until the 1980s part of this redistribution process was done through the inefficient mechanism of tariffs. Tariffs helped to redistribute the wealth generated by Australia’s natural resource comparative advantage because the costs of tariffs and other forms of protection were borne by the resource exporters. For example, if a mining company needed to import machinery that was subject to a high tariff that aimed to protect a local producer then this was effectively a transfer of wealth from the miner to the local producers (and their workers). Farmers who bore increased costs were often compensated by elaborate forms of agricultural protectionism, such as statutory marketing arrangements that raised prices within Australia and which involved further redistribution. Tariffs were also, of course, an important source of state revenue.

Australia has abandoned tariff protectionism and embraced globalisation, but this does not mean we need to abandon redistribution. Indeed, Australia needs to spread the benefits of growth and openness as widely as possible by redistributing wealth and compensating the losers for the continual structural change necessary for adaptation to a globalising world.

While most countries have to adjust to the world ‘as it is’, the choice of adjustment strategy is not set by the forces of globalisation. Varying responses and outcomes are always possible: both the progress of globalisation and adjustments to its opportunities and constraints involve political choices shaped by citizens and the governments they elect.

I agree that the tax was sold badly and was made too complicated by the boffins at Treasury - in particular Ken Henry - who seems to suffer, like Kevin Rudd, from "I'm the smartest boy in the room syndrome". Perhaps it would have been easier just to lift resource rents or impose a federal rent. This would have the disadvantage of not being profits based, but it seems the miners don't like that when they are making large profits and believe that they will continue to do so into the future.

As usual this is all dependent on an assessment that China and India will continue to grow rapidly over the long-term (bolstering growth in the rest of Asia as well and underpinning resource prices). The short-sighted attitudes of miners will hopefully help to get rid of the very risky 40 per cent stake in any losses that the government's RSPT proposed. This was a bad idea and exposes the government to a loss of revenue when the economy slows down, further exacerbating the cyclical decline in government finances that occur during a recession or growth slowdown.

For those interested in a good article on why we need to get more from our non-renewable resources through a resource rent tax should read Sovereign risk? No, superannuation is at risk, thanks to mine bosses by Gerald Noonan

Sovereign risk? No, superannuation is at risk, thanks to mine bosses
June 28, 2010

There has been an uncommon flurry of interest about Australia in the global media over the past few days, courtesy of Julia Gillard's ascension to the prime ministership.
But when travelling overseas in more normal times, it is rare to read anything about the wide brown land in the press - except perhaps a tit-bit on cricket or tennis.
So imagine my surprise when, on a recent visit to Paris, I spotted a reference to Australia in the International Herald Tribune, an English-language paper owned by The New York Times.
The topic was not cricket, nor was it the miners' squabble with Labor over a resources rent tax. Instead, it was Australia's superannuation arrangements. In the article the writer had singled out two countries - the Netherlands and Australia - as shining examples of good public policy-making in a world of seriously unfunded pensions.
In Europe you can count on one hand the number of countries that can seriously claim to be able to pay for their ageing workforces in retirement. You need both hands and all toes to count the number of countries in Europe and in North America (yes, including the US) that have not got a hope in hell of properly looking after their ageing populations over the next two or three decades.
The Tribune mentioned Australia's compulsory 9 per cent of weekly wages which all employees pay into their super funds. The story noted the government had announced it was planning to lift the rate to 12 per cent (though it did not say that it would take until 2019 to get there).
Overall, the tone was complimentary. You got the impression the Tribune was a bit surprised at least someone had got it right, given all the talk of how the debt problems of the PIIGS counties (Portugal, Ireland, Italy, Greece and Spain) were potentially contagious and threatened a second bout of world economic pneumonia.
So it was something of a shock to return to Australia recently to find all anyone could talk about was executives of very rich mining companies bleating about a tax that they themselves had asked the Henry tax review to impose. The miners had argued to Henry that they preferred a profit tax to the crude royalty system that each state imposes on the amount of minerals they dig up and sell.
These minerals are, of course, part of the common wealth - that is, they belong to us all. We are happy for miners to dig the stuff up and sell it for a substantial profit. But there is a limit to how much profit any company is entitled to make out of common resources, and they should pay an appropriate amount back to the country of origin.
It was almost breathtaking to hear and read the extraordinary assertions made by some mining executives and fellow travellers in the finance industry about how a properly constituted tax would affect their investment plans. And in doing so, they had the chutzpah of raising the spectre of sovereign risk. If anyone seriously thinks a fair tax represents sovereign risk, they are kidding themselves. Try real sovereign risk: the sort of sovereign risk faced by countries that do not look to their fiscal bottom lines. The PIIGS group of countries - and add in Britain and California, both with huge debt problems - will have to endure decades of difficulties juggling their books to pay even modest pensions to their retiring citizens.
In my puzzlement, I wondered what had happened to the previously announced superannuation changes … were they still around, and what had happened to the 2 per cent corporate tax cut that the government also promised as part of its package to help ease the transition to the higher super payments?
No, all still in place. However, the ability of the government to fund the corporate tax cut - which in turn was partly aimed at easing the impact of a gradual superannuation increase over the next decade - was being jeopardised by petulant mining companies.
Now, of course, with the chief government digger, Kevin Rudd, interred in a grave as deep as the Kalgoorlie open pit, the wrangling over the details of a resource super profits tax will pass to others.
It is time for everyone to calm down. Markets hate uncertainty, and the Australian public deserves better. The miners and the government need to nut out the finer details of an appropriate tax and resolve the matter.
It would be a great pity to have to write to the editorial people at the Tribune and tell them they had it all wrong. That, at the last hurdle, the country which had put in place one of the best global examples of social policy for its ageing population had fallen foul of an extremely well-funded and self-interested campaign.
Gerard Noonan is the president of the Australian Institute of Superannuation Trustees and a former editor of The Australian Financial Review.

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