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Details of Submission +
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Details of Submission to the Review of
Australia's Future Tax System
The Long Term Impact of the Global
Financial Crisis
Rationalizing the relationship between taxes and
transfer payments and between the tax-transfer system and the economy are
important goals of the Review. For example, a background paper ('Architecture
of Australia’s
tax and transfer system', August 2008) suggested that
"Australia’s economic position
provides an ideal opportunity for reform. The boost to national incomes from
the significant increase in the terms of trade due to the resources boom,
together with Australia’s strong fiscal position, provides a platform on
which to base a reform agenda. Given the challenges that lie ahead, it is
important to have a tax-transfer system that enhances incentives and rewards
effort" (p xii).
While it is now widely recognised that the global
financial crisis (GFC) has complicated this optimistic view in the short term,
it is less obvious that the GFC may well have adverse long term structural
effects on both the economic environment and on prospective government
revenue. It may (for example) make the available tax-transfer options
much less attractive than the Review started out assuming.
A preliminary and simplified attempt to diagnose
both the causes of the GFC and likely complications in resolving it is
presented in
Global Financial Crisis: The Second Test). Of most long term significance
is the possibility that the past basis of economic globalization will be
seriously disrupted (op cit), because (for example):
- the $US had become a global reserve currency,
which allowed US monetary policy to informally stabilize global growth by
counter-balancing the global business cycle, but those monetary policy methods have
been discredited by their association with asset inflation. Moreover the
status of the $US is no longer assured;
- the large global financial imbalances, which
for decades have supported the rapid export-led development of East Asian economies (which
then boosted Australia's economy
and government revenue), will not be feasible in future; and
- East Asian economies face huge (perhaps
insurmountable) cultural obstacles in adjusting to a new environment in which
financial institutions must take profitability seriously because domestically
driven growth would require external borrowing.
Moreover, while determined national (and
eventually international) efforts to create a new basis for global
economic expansion are likely, there are obstacles to achieving
this given the diversity of understandings of the desirable social,
economic and political nature of the necessarily-global new framework (eg see
Obstacles to Effective Global Regulations)
The Review's December 2008 Australia’s
future tax system: Consultation paper
suggested (amongst many other things) that: (a)
Australia is operating in an increasingly
globalized economy - with the crisis in financial markets showing the extent
of inter-linkages (p20); and (b) the shift in the pattern of world economic growth
towards China and India (which has benefited Australia) is likely to continue
despite the current economic difficulties (p21).
Note (added later). It has been suggested that
Australia was seriously exposed to the effect of the GFC because economists
generally- including those in the the Treasury - had assumed that the resources
boom driven by growth in Asia would go on for decades (Cleary P. 'Flawed forecasts: How Treasury misread
the boom', AFR, 29/4/09
Neither of these assumptions is certain. As far as
the Review is concerned, consideration probably needs to be given to:
Note
(added later): An
analysis suggesting that the economic models that have been the basis of rapid
growth and development in East Asia are likely to prove unsustainable in the post-GFC
environment is in
Are East Asian Economic
Models Sustainable?
In August 2010 it was
suggested that:
If iron ore and coal prices reverted to 2002
levels Australia's federal budget would be in $100bn deficit (about 10%
of GDP), and the IMF would be involved. Australia's prosperity is very
narrowly based. Revenues from resources have been increasing and
redistributed by the federal government. Future restoration of budget
surplus depend mainly on mining company profits rather than the policies
of major parties [1]
It is understood that capital gains tax revenue
(driven by property and stock-market booms) have generated most of the
surpluses in Commonwealth budgets in recent years (Kehoe J., 'Capital
carries a bigger load', Financial Review, 11/12/08). Moreover
strong revenue growth associated with capital gains and sustained economic growth
has, over the past decade, allowed both: (a) cuts in
tax rates; and (b) large increases in transfer payments.
Despite their complex relationship with the tax
system, those transfer payments have been socially and economically
significant by helping to maintain a reasonable level of income equality in
Australia despite the incipient emergence of an underclass of those who
failed to cope with an increasingly demanding economic environment (see
Social equity). Market liberalization economic strategies
have thus been able to be pursued since the 1980s more vigorously than in other countries without
giving rise to significant political instability. This in turn facilitated
economic adjustment.
Unfortunately this 'virtuous' relationship is
likely to be disrupted because the property and stock-market booms which
gave rise to capital gains tax revenues as well as sustained global economic
growth have directly and indirectly been products of the asset inflation
that was enabled by the availability of unrealistically cheap credit in
global financial markets - and the latter is unlikely to be available in the
post-GFC environment.
If large transfer payments are not available in future to compensate those
who are unable for various reasons to prosper in a highly competitive
environment, then future policies to facilitate economic change will need to
give more attention to ensuring that large numbers of potential 'losers'
don't emerge. Methods to achieve this could be
suggested but are well
outside the scope of the Review.
Reducing the Adverse Effect of Vertical Fiscal Imbalance on Government
Administration - Re Consulting Questions 8.1 and 9.1
Reducing the cost of complexity seems to be
another major (and worthwhile) goal of the tax system review - as indicated in
Chapter 8 of the
Consultation Paper on Australia’s future tax
system.
However the cost of complexity applies as much to
government administration as it does to the effect on citizens and businesses
though only the latter received attention in the consultation paper.
Rationality is a technique for problem solving that has been
important to the advancement of
Western societies, but this only works
well in systems with fairly simple, predictable relationships. It tends to
fail in complex systems - and decentralization to allow those at the coal-face
of various functions to make rational decisions and take informed initiatives is vital for government
administration, for the same reason that transparent market mechanisms are
essential in economic affairs.
Section 10 of the Review's background paper, Architecture
of Australia’s tax and
transfer system' (August 2008),
drew attention to Australia's vertical fiscal imbalance (VFI) and to the costs
and benefits of this arrangement. It referred to costs such as: a lack of
clear accountability; blame shifting; and increased administrative costs. It
also referred to benefits such as: more efficient tax raising; reduced
compliance costs; national uniformity in services; and ability to address
externalities.
It is
extremely unfortunate that the most significant cost of VFI was ignored -
namely the loss of practical realism and scope for initiative that results
because VFI enforces a dysfunctional centralization of control within state
administrations.
Though the
subject has not apparently been formally studied, there is little doubt that
state governments in Australia suffer from serious weaknesses in carrying out
their constitutional responsibilities. This seems to be widely recognised by
observers. For example, an
editorial
in The Australian of 18/11/08 implied
that NSW was a 'failed state' while an earlier article (Kelly P.,
'NSW is in a state of dysfunction',
Australian, 15/11/08) implied that all states are in difficulties.
Moreover public comments on general infrastructure deficiencies have
circulated for years, and reforms introduced in late 2008 under the Council of
Australian Government (COAG), have apparently been intended to improve the
ability of states to perform their functions (eg by reducing the complexity
of the constraints to which they are subject).
The present
writer has been involved in strategic policy R&D for four decades with a
significant focus on Queensland's government and economy, and has
observed (and documented material others' published about) the
dysfunctional state of Queensland Government
administration and the numerous public
crisis that have resulted in recent years in areas such as
child protection;
electricity distribution,
hospitals, and
water supplies (as
well as a looming
urban transport
fiasco).
There are
numerous historical, institutional and political causes of such problems - of
which one attempt to provide an account is in
Structural Incompetence and SE Queensland's Water
Crisis. This referred to: the 'curse'
of rich natural resources - which induces a community with weak public policy
awareness which depends on external 'authorities'; political neglect of public
administration in the 1980s; failure of amateurish reform efforts in the early
1990s; and the resulting creation of ineffectual machinery of government.
However Australia's VFI is also a significant part of the problem.
Australia's VFI
distorts the machinery of state government administration by centralizing
control (ie in the hands of those concerned with lobbying for federal funding)
and reducing the relative influence of those with practical knowledge and
experience of what needs to be done in relation to particular functions and
how to do it. This argument is
explored in more detail
as one of the themes in
Australia's Governance Crisis. The present writer's suggestions about
VFI are the result of observation and study of the effect in Queensland of the
major expansion of special purpose funding by the Whitlam Government in the
1970s which led to a permanent power shift within that government from
'practitioners' to 'lobbyists', a shift that: (a) paralleled the effect that
tariff protection had on manufacturers; and (b) contributed to the
long-term decline in that state's effectiveness in meeting infrastructure
needs.
Unfortunately, in the absence of systematic
research, views publicly expressed about what is wrong can be superficial (eg see
It's time to fix the failed
state and
Fixing State Governments which
respectively commented on suggested 'solutions' involving: (a)
changed political arrangements; or (b) a private sector takeover of
states' non-core roles).
Similarly the 'new federalism' framework, that
is now to be put in place as a result of COAG negotiations (eg see
'Rudd stamps reform mettle on COAG', The
Australian, editorial 1/12/08), is apparently also based on a highly
simplistic understanding of what is required for governments to be effective.
Simplifying centralized control has no
more prospect of success than the 'n' earlier schemes that federal governments
have devised in their attempts to more effectively manipulate state functions,
because:
- the latest 'new federalism' package has
apparently done nothing to reduce states' dependence on federal funding
that distorts their administration. 'New federalism' arrangements, which
reduce the number of special purpose programs, will not reduce this
distortion. Moreover the introduction of 'performance' measures must
actually increase the centralization of power within state administrations
that dis-empowers those with the knowledge and skills needed for effective performance;
- the complexity
of government functions can not be adequately reflected in any finite set of
'performance' measures - see
Problems in Specifying Service
Outputs. Certainly whatever is
specified is most likely to be emphasised - but this is equally likely to be
at the expense of common sense. An instructive example involves the
crisis in Queensland's
electricity distribution network that
resulted when 'success' for the relevant agencies was defined in terms of
dividend payments to government and upgrading the distribution network was
forgotten - though that necessity would have been obvious to engineers who
no longer had any say. Furthermore;
- government can not be
simply reduced to 'service delivery' - see
Service delivery can't solve
some pressing problems and
Governing is not just Running a Large Business.
The essence of the role of government (see
Fixing State Governments) is managing real-world relationships
involving: (a) creating a regulatory framework; and (b) arranging the supply
of goods and services that can't be coordinated adequately through market
mechanisms. There two aspects of governments' responsibilities can't be
separated and promoting competitive arrangements within government machinery
(as has been required under the National Competition Policy in the hope of
promoting efficiency in service delivery in isolation) has impeded the
ability of states to function effectively (see also
Review of National Competition Policy Reforms: A Commentary).
There are institutional obstacles to
identification and resolution of administrative problems associated with
Australia's VFI - because of the existence of a VFI 'industry' within both
federal and state governments whose participants' career prospects depend on
maintaining that 'industry' and who tend to be the ones from whom advice about
the subject is primarily sought (eg through COAG) without considering broader
requirements. It is not in the interests of the individuals whose roles
constitute a major obstacle to practical realism and initiative in state
administration to identify those problems, while others find themselves
confronted by a mysterious 'black box' linked to High Court judgments about
the taxing powers of the federal government and they thus simply put the whole
subject into the 'too hard' basket.
The development of a tax system under which
various levels of government have financial capacities roughly equal to the
cost of the functions for which they are responsible may be the best
way to reduce such distortions - and to improve the effectiveness and
efficiency of public administration overall. State governments arguably need to
be allowed to take real responsibility for their constitutional functions, and
be held accountable by their electorates. Presumably national coordination of activities
and reform agendas can be promoted without dominant financial control, while
externalities could be addressed with relatively minor amounts
of discretionary federal funding.
Providing
Incentives for Effective Economic Development (Consulting Question 9.2)
General responsibility for stimulating economic development in Australia
falls to state governments, yet the tax revenues and transfers that have
been available to them distort their priorities in doing so in ways that are
contrary to the general community interest.
As the Review's
Australia’s future tax system: Consultation paper noted, tax systems and
transfer payments affect the behaviour of individuals and businesses.
"All taxes and
transfers affect the choices individuals and businesses make by altering
incentives to work, save, invest or consume things that are of value to
them. These changes in behaviour can ultimately leave the economy and
society as a whole worse off than if the revenue were raised (or
distributed) without affecting behaviour." (p34)
However taxes and
transfers also affect the behaviour of state governments, and the latter can be
expected to encourage activities that maximize their revenues.
As is noted in
Section 10 of the Review's
Architecture of Australia’s
tax and transfer system:
"The current array of state taxes
includes taxes which are transaction based or are levied on narrow tax bases.
The opportunities for the States to introduce new forms of taxation are
limited. Where States have sought to increase their taxation revenue, they
have often resorted to taxes which are narrowly based or designed to realise
some gain from rapidly growing areas of the economy. Other taxes such as
conveyance duties have delivered increasing amounts of revenue to the States
in recent years, but the tax base can be subject to fluctuations in line with
the property market." (p292)
Australia's states have a relatively narrow set of
revenue sources compared with the federal government. In particular, as noted
above, state revenues relate to the value of transactions, rather than to the
value added within the economy. The latter, however, is the base of major
federal taxes such as income tax and the GST.
Moreover transfer payments under the Commonwealth
Grants Commission's horizontal equalization principles have distributed
federal tax revenue amongst states in accordance with their need for spending
(and their revenue capacity) - irrespective of the the revenue which the
federal government derives from value added by a particular states' economy
(see
Review of Grants Commission Arrangements, 2001). As the latter noted, this
practice results in large transfers of federal revenues between states.
The overall result is that states that do not take the development of economic
productivity seriously (ie are content to encourage the rapid expansion of low
value-added economic activities) suffer no financial penalty.
This seems dysfunctional because:
- value added (which in simple terms is the
total for all entities of: return on capital; wages and salaries paid to
employees; and net payments to government) is a better measure of the
community's 'wealth' than is the value of economic transactions. In fact large
economic transactions can occur with no value being added to fund profits,
wages and taxes;
- states are effectively encouraged to favour
economic activities that maximize their transaction-based income, rather than
encouraging economic activities with higher value-add which would boost: (a)
the wealth of the community generally; and (b) the tax base available to the
federal government.
The present writer had close involvement for a
decade in attempts to formulate strategies to develop a more productive
(ie higher value-added) economy in Queensland's during the 1980s and observed the resistance that
arose from the Treasury whose logical concern was to: maximize (a)
transaction-based state revenue (eg mineral royalties); and (b) transfers from
the federal government under Grants Commission arrangements. Queensland had
traditionally had a relative low per capita state product (ie about 85-90% of the
national average) because of its emphasis on rapidly-growing but low value
added industries. A more complete account
of Queensland's 'traditional' strategy (with its emphasis on 'growth' (more
economic transactions) rather than 'development' (more productive economic
activities) is included in
Queensland's Economic Strategy.
Though policy since then has nominally endorsed
the development of a more productive economy and the situation has improved
marginally - there has remained no financial incentive for the Queensland
Government (or presumably any state government) to do so, Rhetoric
about economic development has involved more political pretence that
substantive achievement (op cit) - yet this has no financial consequences for
the Queensland Government.
Australia might significantly improve its economic
performance if states had financial incentives to encourage high value added
economic activities - through a much broader range of own-tax sources.
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Response to AFTS Report +
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A [Working Draft] Response to AFTS
Report
Introduction
In May 2007 the Commonwealth Government released
Australia's Future Tax System, Final Report: Overview (and two
detailed supporting documents), as well as its response to the review (Stronger,
Fairer, Simpler - Australia's Future Tax System Government Response).
AFTS Report
The AFTS Report covered a large range of topics related to Australia's
taxation system, and seemed to do so in a workmanlike / competent manner.
Several expert observers reacted very favourably to the Report [eg 1]
The comments on the AFTS Report that follow will be mainly concerned with its
assumptions about the context in which the tax system will operate, rather
than with its analysis or proposals. In particular, the
international context may be
nowhere near as favourable as the AFTS Report assumes, and fundamental
assumptions about other important issues (eg housing affordability;
federal fiscal imbalances; and energy
cost) also seem suspect.
Commonwealth Government's Response
The Commonwealth Government's initial response to the Report involved:
- introducing significant new taxes on resources' industries (in the form of a resource
rent tax, which was labelled a 'Resource Super Profits Tax' - RSPT); and
- directing the resulting increased revenues towards other businesses
(eg as tax relief) and the community (as increased business-funded superannuation savings
and additional spending particularly on health / hospitals).
The Government's initial response generated widespread controversy.
Observers were initially concerned that the Government did not address most of the issues raised in the AFTS Report [eg
1,
2], in relation to which the Government itself stated that a full response would
take many years. However most debate focused on the controversial RSPT .
Examples:
- government did not heed warning about housing affordability [1];
- government avoided broad based reform and instead sought to rebuild
its balance sheet at the expense of economy / resource industries [1];
- additional super contributions will deprive manufacturers of cash
which they need to build businesses [1];
- tax reform has been deferred while the government rebuilds its
balance sheet following spending to deal with GFC [1];
- government has not undertaken simplifications of tax system
suggested in Henry report [1];
- government commissioned report is a step towards broad-based
economic reform, but its response narrowed to a distributional conflict
[1];
- concerns about tax reform strategy include: claims that
superannuation increases will hurt jobs; mining industry says taxes
don't reflect real world understanding; distribution of mining
infrastructure fund [1];
- Review was a first-class public policy document for those interested
in Australia's fiscal future. From viewpoint of economy, there would be
benefits in implementing it as a whole. Review proposed simple and
transparent tax and transfer system. Many recommendations won't be
implemented because it is considered that they won't be affordable at
present. However many of the productivity enhancing measures (eg cuts to
personal and business taxes) would have been a better response to GFC -
rather than the large public spending spree that the government
undertook. The chief risk with review was that its emphasis on how to
increase revenues to close GFC-induced budget deficit, distracted
attention from reducing wasteful government spending. The large overlaps
in responsibility between federal, state and local governments results
in wastage that now needs attention [1];
- Budget inflation forecasts have been suggested to be too low given
strong economic growth and full employment (Murdoch S., 'Treasurer
playing politics on outlook', Australian, 13/5/10;
- the AFTS review was left and orphan (ie not publicly promoted or
explained) after its presentation [1];
- government adopted only 3 of 138 recommendations of tax review. One
that was adopted was RSPT which was a theoretically elegant tax model.
However it was not, as it should have been, exposed to real-world
feedback before being announced [1]
Some observers was expressed serious concern about the
RSPT proposal -
resulting in vigorous debate:
- proposals to refund state mining royalties are seen as adding to red
tape [1];
- the complexity of the RSPT proposal was of concern to some company
directors [1]
;
- the budget assumes that adopting the RSPT will increase mining
activity [1]
- Treasury Secretary has denied that RSPT proposal was designed to
slow investment in mining industry [1]
- the proposed RSPT is much more radical than a
tax on high rates of profits. Rather it makes government into the 40%
silent partner in every new and existing mining, oil and gas project [1];
- replacing mining royalties with a super-profits tax is complex. This
system (which makes government into partner in projects) would reduce
equity requirement for developing projects and leave investment
incentives unchanged. But this has the effect of reducing management
motivations for increasing productivity. Also this tax would only apply
initially to projects that have succeeded, not to those that have failed
- as it should in principle (ie it will tax the winners, without funding
the losers). The proposal to refund state mining royalties creates
incentives for increases in royalties - as SA has already done [1];
- Resource Rent Tax was badly timed - coinciding with Greek meltdown
and Wall Street trading chaos. However it proposes increasing taxes on
most competitive Australian industry - at the same time that taxes on
others are reduced [1];
- China's economy may be unable to sustain demand for commodities - so
a super tax on resources might yield little revenue [1];
- The response by mining industry to resource super profits tax will be a
capital strike that will cripple state economies in WA, SA and Queensland
[1]
- RSPT could increase foreign ownership of Australia's resource
industries - because domestic investors would be deterred from ownership
as the proposed tax would not be eligible for franking credits on
dividends [1];
- given sovereign debt crisis and potential economic slowdown in
China, proposed resource rent tax could be a calamity [1]
- the introduction of a RSPT would radically change conditions under
which resource investment would be made (as it effectively makes
government into a 40% partner in such operations) and its introduction
raises ongoing concerns about sovereign risk [1];
- removal of provisions for government to reimburse losses on
unsuccessful mining investments might create a tax regime that would be
acceptable to all parties [1];
- RSPT will eventually result in Australia's government writing a
cheque for losses incurred by Chinese government in a failed mining
venture. China will be main beneficiary of RSPT as there are two groups
of investors in resource projects - those interested in profits (like
Australian mining companies) and those interested only in resource
security as part of economy as a whole. The RSPT is good news for the
latter because it makes resources cheaper and includes refunding losses
on unsuccessful ventures. China is the world's largest resources user,
and focuses on resource security rather than profits [1].
- Treasury secretary, Ken Henry, yesterday defended the government's
proposed resource profits tax, saying it would boost the mining industry
and the economy despite warnings from companies such as BHP Billiton
that it would force projects overseas [1].
- Ross Garnaut seeks changes to proposed RSPT related to Treasury
assumptions for guarantees on project losses and the cost of financing
new projects. WA Treasury warned that tax could severely undermine
state's economy. Garnaut questioned whether future governments under
financial pressure would cover costs of project losses, and whether
mining projects could attract finance at government bond rate (Shanahan
D etal 'Garnaut backs mine tax changes', Australian, 21/5/10)
- Treasurer needs explain RSPT or else it will become another ETS - as
there are many questions about it (Cohen B ' Mr Treasurer, we have a
few dozen questions', Australian , 21/5/10)
- The resource tax rebate on loss-making enterprises may favour China.
Chinese investor seeking resource security could be major beneficiaries
of RSPT according to president of Australia China Business Council in WA
(Duncan Calder). Lower profits available to investors would not be a
problem for Chinese investors with downstream processing operation.
Under the proposed tax China would face less competition for projects
from rival sources of capital (Burrell A 'China could reap rebate
on mines', Australian, 22-23/5/10
- Treasury Secretary provided a theoretically elegant defence of RSPT
- arguing that it would not discourage investment because the effect of
the tax is to split investment into two halves - 60% involves corporate
profits and 40% involves government as partner, on which company would
be guaranteed a return equal to government bond rate. However this is
ivory-tower nonsense, as companies won't be willing to use capital in
ways that generate only government bond rate. (McCrann T. 'Henry's
elegant nonsense', Australian, 22-23/5/10)
- Budget expects return to surplus in 3 years - and relies heavily on
proposed RSPT. Treasury believes that loss of some mining projects could
have macroeconomic benefits for Australia, but reducing pressure on
economy, and thus need for rises in interest rates. It would also reduce
the problem of managing a 2 speed economy. (Shanahan D etal 'Mining
delays not all bad', Australian, 13/5/10 )
- Treasurer told mining industry to cease public complaints about
proposed RSPT and engage in private with government. But when companies
did so, they discovered that committee was only empowered to discuss
implementation of the tax (in effect seeking information from companies
that would disadvantage them) (Stevens M 'Stunned by Swan's committee',
Australian, 13/5/10);
- Government considers that 40% RSPT would help manage economy -
because reduced mining investment would make it less necessary for RBA
to raise interest rates. Also the queue of mining projects waiting
development is considered too large for the economy to handle. (Stutchbury
M 'Canberra doesn't mind if a few miners get shafted', Australian,
13/5/10)
- Federal Treasury has argued the case for resource rent tax in terms
of reducing problems associated with two speed economy, while moderating
the boom and making it more sustainable (Cleary P 'Treasury tries to
tame the resource curse', Australian, 15-16/5/10);
- Government has not fully explained its RSPT proposal. Budget papers
reveal Treasury diagnosis of how mining can sometimes lower long term
economic growth. Not all resource rich countries can turn resource
wealth into sustained economic performance (eg because of rent-seeking
corruption, and raising exchange rates that squeeze out other
industries. This problem has mainlky hit developing economies - where
democratic governance is weak and corruptible (Stutchbury M 'More
discipline needed to turn boom into a blessing', Australian, 18/5/10)
- Ken Henry believes that proposed tax is elegant and efficient. But
what seems good in theory has problems in real world. Government now
denies that tax would impede mining investment - yet two weeks ago PM
aregued that it was intended to benefit whole economy while drawing
attention to problems resulting from resource investment (eg driving up
value of dollar which hurt other industries; soaking up skilled labour;
and costing more for government to support than other sectors). he
argued that 40% super-tax would dampen mining investment. Given adverse
mining industry reaction, government is now emphasising benefits to
smaller more marginal operations of government 40% share of costs and
benefits - though the fact that government would pay 40% of losses on
failed projects is not a good selling point in raising capital. There
was no consultation with mining industry before tax (which no one else
in the world has introduced) was announced. Miners were expecting more
taxes, and favour replacing state royalties with a profit based tax, but
didn't expect: rate of new tax; that it would apply to all mining
projects; that it would apply to existing projects; and that definition
of super-profit would be set low. (Hewett J 'Miners in lose-lose
scenario over super-profit tax, Australian, 18/5/10)
- there is a lot the government could do to reduce mining industry
concerns about the RSPT [1]
- the RSPT is too high; risky and will slow investment [1]
- the RSPT has made Australia a much less attractive place for
investment [1]
- RSPT is not a tax in the normal sense - rather it is a resource rent
- which is a charge against the value of minerals over and about the
costs and normal profits that a mining company would reasonably expect
to receive [1]
- Fortescue Metals CEO (Andrew Forrest) warns that China will tighten
its grip on Australian mineral industry under planned RSPT. A leading
Chinese entrepreneur noted that plans for a major equity investment in a
SA project would continue. Local and foreign banks have backed away from
financing Fortescue projects because of potential impact of RSPT. But
there does not seem to be any Chinese opposition to the tax. China sees
the ability of Australian companies to develop mining projects being
removed. A Chinese businessman noted that the tax would discourage
investment in Australia's mining projects, but those interest in
securing raw materials supplies would find investment attractive
(Burrell Andrew, 'New tax fortifies China's hold', Australian, 20/5/10)
- there have been counter-arguments for and against the proposed RSPT.
The governments case is that miners have earned huge profits from recent
minerals boom, and community should share in this. This is justified as
finite resources are being exploited. Other's have introduced
'super profits' taxes - and it is claimed that the RSPT is 'world
leading'. and should produce few distortions. However detailed of
tax have not been resolved, and its introduction phasing in have not
been resolved. Miners argue that tax is too high; long term
government bond rate is too low; there is too little scope to deduct
expenses; and the reach of tax is too wide. Consensus of economists in
the past has been that: super profits tax rates should be low; and
government bond rate is suitable for carried forward costs. Also many
complex details of such taxes must be in balance for appropriate
outcomes to be achieved. The government has not yet got the model right,
and it needs reconsideration [1]
- there are many complexities in proposed theoretically-elegant RSPT -
and it would be better to seek a second best solution by building on
what already exists. Resources boom will end eventually, and future
governments be faced with requirements to pay $bn to failed mining
venture [1]
- Chinese companies have expressed concerns about the RSPT, and noted
that reduced returns would be likely to affect the viability of
projects. However their concern is with reliability of supply, rather
than the effect on profitability [1]
- Treasury Secretary (Ken Henry) presented the case for RSPT - but
this was done at the wrong time ie long after the RSPT had been
announced and controversy had developed. [1]
- Chub Witham (Headland Minerals) suggests that RSPT was devised by
people with little knowledge of the industry. Three aspects cause
concern; it encourages Australia miners to more offshore; opens the door
for Chinese domination of exploration in Australia; and will use tax
dollars to bail out failed projects (Barrass T. 'Tax may bury locals:
explorer' Australian, 25/5/10)
- US expert argues that miners are wrong and that RSPT will lead to
just the right level of mining investment - as the (Brown-type) tax is
designed to tax the value of the resource itself, not its development.
It is better than royalty system because the latter involves government
taking tax off the top - without bearing any of the costs of resource
development [1]
- the RSPT would affect the types of resource investments that would
be made, rather than discouraging investment altogether [1]
- imposing a tax retrospectively as is intended for RSPT would result
in serious perception of sovereign risk for Australia (Ralph J.,
'Retrospective tax a risk to national sovereignty', Australian,
25/5/10);
- RSPT will make it harder for miners to sustain the boom (Tasker 'Tax
threatens to choke off second mining boom', Australian, 25/5/10);
- the basic idea of replacing state royalties with a profits' based
tax is valid, but the way the proposal was introduced was disastrous
(Kelly P., 'Labor is caught ina Catch-22 of its own making', Australian,
26/5/10);
- proponents of RSPT argue that it amounts to government taking a 40%
interest in mining projects - but investors will not be willing to rely
on any government undertaking to cover losses on failed projects [1]
- a group of prominent economists has
argued that the RSPT proposal is
a more efficient way to tax the mining industry, and will not lead to a
slowdown in the sector [1]
- Treasury secretary argued against claims that RSPT would be death
knell for the sector - as models showed that mining would be profitable
under the tax (noting that royalties would be abolished). [1]
- Federal Government is moving towards major changes to its RSPT
proposal (eg lift super profit threshold from 6 to 11-12% and withdraw
40% taxpayer-funded contribution to losses) - though mining companies
insist that this will not reduce risk to investment in Australian mining
[1];
- RSPT is a federal tax grab that the states should reject [1]
- production-based resource royalties are more difficult for mining
companies to deal with than profit-based taxes such as the proposed RSPT
[1];
- the RSPT as proposed deserves mining industry criticism, because it
would not factor in expenses incurred in generating income; unfairly
penalises on economic sector; and involves partial nationalization of
the resources sector. Similar tax concepts were considered, and
rejected, by the Ralph Review [1];
- there is a need for rational and calm debate about RSPT. It is a
complex policy issue that has been endorsed by government on the basis
of knowledgeable advice. Australia needs to make its own way in the
world outside the North Atlantic trade blocs - in a democratic
capitalist world in crisis. When a government gives a mining lease, it
is giving away state property (just as when it allocates land to a
private party), and the community should expect to receive full value
for this. The economic rent reflects that value, and governments
should extract it as taxation. It also promotes more equitable income
distribution. The RSPT (a modified Brown tax) needs to be debated
properly. This is a dangerous time, and Australia must restore its
capacity to implement policy in the public interest, independently of
pressure from sectional interests [1]
- government advertising claims that mining's contribution to
government revenue fell from 1/3 of profits to 1/7 in the mining boom.
But nibers argue that this only applies if one considers only royalties
and ignores corporate taxes - to which the government responds that the
latter apply to all companies and are thus irrelevant [1]
- the resource rent tax proposed by Henry review is a modified Brown
tax. The latter involved government taking a (say) 40% exposure to
resource projects - in terms of both profits and losses. This was
modified (because governments don't like paying out on losses) in terms
of government allowing losses to be carried forward (increasing at
government bond rate) and written off against future losses. However
there is a problem in applying this to existing profit-making projects
without providing compensation for past loss-making projects. Also the
whole arrangement is so complex that no one really understands it fully
- so counter-productive changes could easily be made in future [1]
- low asset valuations because of policy risks give Beijing a golden
opportunity to secure its supply chain. China seeks to avoid market
fickleness by building its own supply chain. RSPT proposal in Australia
causes miners to warn of reduced investment. This involves Rudd
Government endorsing the case about 'excess profits' that China's
steel-makers have expressed. Under RSPT proposal resource prices would
fall - as miners would not pursue profits vigorously to merely pay more
tax. And as supply stagnates, China would be able to overcome resistance
to its investment in resource projects [1]
- financiers do not like the idea of government as a silent partner in
mining projects [1];
- a year ago PM was criticising theoretical models used by
neo-liberals, yet now he is using such models as the basis for
justifying RSPT [1]
- Henry tax review sought a fairer share of mineral revenues as taxes.
Review and government wanted purest form of resource rent tax - a Brown
tax - which would distort decisions least. It is a simple tax on cash
flows. Government becomes silent partner by quickly refunding its share
of negative cash flows and taxing positive cash flows - discounted by
return on capital required to justify investment. But they wanted to
avoid up-front cost of Brown tax. So an 'elegant' alternative was used -
promising to pay governments share of expenses over time as offsets
against profits. Government would still be 40% silent partner, but
instead of being written off immediately capital spending would be
depreciated over time and owners would get interest on their corporate
capital (undepreciated capital and unused losses) at government bond
rate. Miners don't like government as silent partner, and having
to finance their share of expenses at bond rate. Given failures in
1990s, they fear being hurt by losses by speculators and poor managers.
Garnaut points out that Brown tax creates problems for government where
large projects require large refunds - and this increases investor risk
that politicians may simply change the rules. Henry's claim that firms
would be able to finance effective loans to government at bond rate is
unrealistic. Silent partner model also creates moral hazard risk
for investors in structured projects at times of downturn - to wind up
operations prematurely. This would increase fiscal leverage to the China
boom. Garnaut suggests abandoning RSPT and adopting bersion of PRRT.
Government needs to examine all these options [1]
- a Chinese investor expressed concern about introduction of RSPT -
and planned to seek special exemption because his project required
massive upstream infrastructure investment and downstream processing to
be viable. The latter need to be taken into account in determining any
super-profits tax [1]
[Comment: it is understood that profits in mining / processing
operations emerge primarily in the mining stage and tend to be much
lower in processing, so that unless the whole operation is considered
estimates of profits on mining alone would overstate the true picture].
- Head of Future Fund (David Murray) has called for RSPT to be
abandoned or overhauled arguing that it robbed future generations and
risked Australia's international reputation [1]
- government should impose taxes to redistribute income [1]
- a resource rent tax is the best options for gaining revenue from
mineral assets [1]
- Henry review should have taken its own advice and suggested a cash
flow tax [1]
- former senior Treasury official has undermined modelling that was
the basis of RSPT by disagreeing that China's resource demand will
ensure sky-high demand - as 4050% falls in commodity prices are likely
long term. Also Access Economics (Chris Richardson) argues that resource
rent tax is flawed because it taxes entrepreneurship - whereas Henry
review suggested that it was efficient because it taxed immobile capital
[1]
- even given expected loosening of RSPT arrangements, Australia's
mining industry will die in the longer term because exploration efforts
would cease [1]
- if there were a major slump in mining, then the RSPT (which
effectively makes government into a 40% partner in mining projects)
would result in substantial costs to taxpayers [1]l
-
Economists' conference showed support for RSPT in principle - but revealed
substantial design problems. It would yield windfall government revenue in
short term at expense of long term. Jack Mintz (Uni of Calgary) suggested that
there has been no consideration of relationship between RSPT and company tax.
The government would be 40% partner in resource projects - but would not pay
40% of company tax. The effect would be to make marginal mining projects
non-viable. Applying RSPT to all existing projects would concentrate all
revenue gains at the beginning. If it applied only to green-field projects it
would generate little revenue for 10 years. Industry Commission tax review had
proposed a purer brown tax - under which government contributed 40% of capital
costs. RSPT finances government's share of capital from company with interest
equal to government bond yield. An up-front contribution would directly
confront the likely financial implications for government of tax regime. RSPT
proposal would allow government to spend initial windfall - while ignoring
potential long term costs. Better arrangement would involve quarantining
revenue into fund that was separate from consolidated revenue with yield
provided to government only if it is clear that long term obligations could be
met (Stutchbury M. 'Tax rigged to yield windfall government revenue', A,
24/6/10)
An when the federal government responded to criticism and
transformed the RSPT into a Mineral Resource Rent Tax (MRRT) there
were further expressions of concern:
- the concessions made to large mining companies is likely to lead
to pressure from many more rent-seekers (Expect
a conga line of rent seekers, 5/7/10);
- while the MRRT arrangement will be more economically efficient
that what existed before, the backflip over this probably marks the
end of microeconomic reform in Australia [1]
- changes to the resource tax involve reducing the rate from 40%
to 22.5%; reducing the number of affected companies from 2500 to 32
- yet this is only supposed to reduce tax revenues by 1/8. There is
a lack of clarity about what is going on [1]
- mining companies claim that they will pay 2/3 less tax under
revised scheme, whereas government expects only a small fall in
revenues. There is a significant chance that government will receive
no revenue from the tax. Their expectations require significant
lifts in sharemarkets. The government was first convinced that it
should tax only coal and iron ore - as other minerals were high risk
and thus required high returns or they would not proceed. ABARE
lifted its forecasts for coal and iron ore prices (which had been
the basis of earlier $12bn government revenue estimate)
significantly - in line with Treasury's 4.5% global growth estimates
(reflecting expectations in December 2009 which have since
reversed). Government negotiators were happy to work with these
unrealistic estimates as they made new PM look brilliant. If
government economic forecats are right, then sharemarkets have
completely misread the situation [1]
International Context:
There is a serious basis for concern with assumptions
about the international environment that underpin both the AFTS
Report and the Commonwealth Government's response to it.
The AFTS Report's
View
The review started by identifying the changes expected over the next few
decades with the first involving "a new world economic order based on
ever-deepening international integration, with new centres of competition
and opportunity increasingly located in close proximity to us;"
Extracts from Australia's Future Tax System: Report to the
Treasurer, December 2009 Part One: Overview
"The taskThis Review considers how Australia can best structure its
tax and transfer system to meet the challenges of the 21st century and to
enhance its economic and social outcomes.
Australians face far-reaching change. As we navigate that change, our
challenge is to maintain our strengths, sustain our values and fulfil our
promise. The Review looks forward over the next 40 years to mid-century.
Through these decades we expect:
- a new world economic order based on ever-deepening international
integration, with new centres of competition and opportunity
increasingly located in close proximity to us;
- the transformation of business, commerce and personal lives by
technological advances, especially in digital electronics and
communications;
- ageing of the population, reducing some tax bases and raising
the costs of health, aged care and dependency;
- strong growth and cultural diversification of our population,
with high demands for economic infrastructure, education and social
infrastructure spending;
- deepening stresses between human activities and wider
ecosystems, globally and locally; and
further stresses on housing affordability and pressure on urban
amenity.
Unfortunately, we must also assume that the world will continue to
present high risks of conflict imposing high security costs.
Our task is to define a tax and transfer system that anticipates
and responds to those expectations. We find that much of the key
architecture of the existing tax and transfer system, built last
century, reflects sound policy frameworks and Australian social values
and will still serve us well.
But not all of it will — a range of key reforms would even better
equip us for the changing era ahead." [ p xv]
"1.3 The rise of Asia and the shifting centre of world
economic activity
The Australian economy is being transformed by the emergence of
new centres of competition and opportunity in the region. The shift of the
centre of gravity in the world economy towards Asia is reducing the distance
between Australia and its export markets, adding considerable value to our
natural resource wealth and opening new investment, trade and employment
opportunities. However, growth in Asia will also attract globally mobile
capital. Australia will need to respond if it is to remain an attractive place
to invest The need for reform and do business. Part of
this response should be to ensure that the tax system supports investment,
allocates resources to their most valued uses and does not inadvertently add to
the cost of production through taxes on business inputs or excessive complexity
and compliance costs.
With much of China and India at an early stage of catching up
with the living standards of the developed world, strong growth in these
countries could continue for a long time (see Chart 1.2). It is therefore likely
that demand for non-renewable resources will remain strong and underpin, for
some time and possibly for decades, a structurally higher terms of trade2
than existed for much of the past 50 years. This view appears to be
shared by investors, as evidenced by strong international interest in investing
in the Australian resources sector. It would be a mistake to conclude that the
prospect of a continuing high terms of trade would translate into
increased wealth for all or underpin a broad employment base. The
expansion in the resources sector and a stronger exchange rate will
continue to draw productive resources from other parts of the
economy. Policy responses that expand the supply of productive
resources in the economy may ameliorate this adjustment and support a
more broadly based economy. Tax and transfer policy settings can
influence the effective supply of labour and capital through their
effects on the incentives to save, invest and work, and by improving
the productivity of labour and capital. ..... "
[pp6-7]
1.4 Increasing globalisation"With continuing globalisation, tax settings will be of increasing importance for
decisions about where capital will be invested, especially for small open
economies like Australia.
Many countries are reducing tax rates on business
and capital income relative to labour income and consumption. There has been a
clear downward trend in statutory company income tax rates, particularly among
small open economies (Table 1.1). Empirical evidence indicates that company tax
rates matter for investment decisions, particularly investments for which
location is not critical, and decisions by firms about where to declare profits
and pay tax. ...." [p8]
Australia's Luck in not Guaranteed
However there are potential obstacles to the continued
global economic integration and expansion that the AFTS Report takes as a starting point in
assuming that Australia's economic prosperity will be underpinned by
strong demand for natural resources, especially from its Asian
neighbours.
Example: Australian government and mining industry expect that paradigm
shift in global resources markets and secular bull market will last for decades.
This is based on the view that China's urbanisation is unstoppable, and will be
resource intensive. China is urbanising; has a population 1.3bn, 50% of whom
still live in countryside but are moving to cities at a rate of 15m pa. The
costs of being wrong about this expectation would be high. This is the basis of
RSPT proposal by government to seek 40% of super profits. Government no longer
believes in property market cycles. But commodity ycle will still apply .
Commodity prices are on long term downtrend over thousands of years
due to technological advances. This is interrupted at times -
usually during periods of industrialization. Also the intense use of
commodities in China's industrialization will end eventually - and
lead to resumption of downtrend. No one seems to be considering this
at all (Wyatt S. 'Blinded by faith in
never-ending boom', AFR, 22/6/10)
In May 2010 the most obvious example of a threat to continued global
economic expansion involved the risk of a renewal of an international
financial crisis associated with unsustainable levels of sovereign debts
(especially in Greece and other peripheral European nations).
However
this is not the only risk (see Unresolved Problems and Coming
Crises in Defending Australia from the Financial Crisis).
Other likely difficulties include:
- unresolved problems in financial institutions as a result of past
financial instability (some of which started to become exposed in
major European banks as the effect of their exposure to sovereign debt
problems in southern Europe was considered);
- the fiscal drag on growth due to the debts governments were
obliged to incur to rescue their financial systems (a problem that the
European sovereign debt crisis will exacerbate);
- over-investment, and the apparent emergence of a property bubble, in China in an attempt to maintain growth in the
face of the GFC - which threatens a short-medium term slowdown /
recession.
But the most serious risk arguably arises from cultural
differences between various societies which analysts (eg
economists, political scientists) tend to be unaware of, because of
prevailing assumptions about the universality of Western-style
institutions.
Competing Civilizations (2001) outlines dimensions of significant
differences particularly in relation to:
- Western societies which
led the world in economic and political modernisation and in the establishment of global
institutions, based on individual / collective rationality within legal
and financial constraints;
- East Asia
which, led initially by Japan and later by China, is achieving economic
modernisation and exerting increasing international influence, based
on radically different methods of problem solving (ie consensus within
ethnic communities); and
- Islamic
societies which form the largest single group yet that have yet to
develop workable paths to modernisation arguably because of social
constraints on economic change - a problem that currently is the source
of international stresses and conflicts.
Continued economic integration and growth is not inevitable, as demonstrated
by the failure of 19th century globalization as the prelude to World War
I. Similar risks remain partly because economic and political analysts
usually take no account of the practical consequences of differences in cultural
assumptions (see The Second Failure of
Globalization?).
Amongst those practical consequences are:
The resulting challenge to assumptions in the AFTS Report that Australia's economic prosperity
for the foreseeable future will be underwritten by Asian commodities' demand is that:
- there is real risk that East Asian economic models (and thus their
demand for resource inputs for peaceful economic purposes) will fail in
the medium-long term;
- Australia's federal budget position reportedly depends critically on
the high coal and iron ore prices associated with the 'China boom', so
considerable adjustments would be needed if this eases [1];
- if those models prove sustainable, and regional economic and
political institutions come to be dominated by 'Asian' communitarian
traditions, then the economic basis of reforms embodied in
the AFTS Report (which involves creating an environment attractive to
profit-seeking / 'capitalistic' enterprises) would be inappropriate and
inadequate. In particular;
- the Resource Super Profit Tax proposal, which was taken from the
AFTS Review and appeared to be the major source of future new revenue
the 2010 Federal Budget relied upon, might actually result in a large
reduction in overall government revenues from production-oriented
'Asian' investors in Australian resource development, rather than the
increase that would be expected if Western profit-oriented mining
companies dominate (see RSPT Won't Hurt
Miners: But Pity Help Naive Australians) .
There remains a need for such issues to be more fully analysed
as the present writer suggested in a submission to
the AFTS Review.
This is particularly critical as it seems that the
Federal Treasury seems to have accepted the 'this time
its different' hypothesis in relation to Australia's resource boom - and
this assumption has been adopted also in the federal Governments 2010
budget [1,
2].
Housing Affordability and Australia Banking
System
The AFTS Report assumes that problems in housing affordability are
primarily a consequence of constraints on supply. However this may be
overly simplistic. Moreover the stability of Australia's banking system
and international access to the capital required to balance large
current account deficits are affected by the value of property - and are
potentially at risk.see
notes
Falling housing affordability is mainly a problem for state / local
governments
Politicians express concern for home buyers when interest rates rise,
but don't want to do anything real about this because 68% of community
are home owners who benefit from rising values. So governments pretend
to so something (eg with home buyers grants that increase prices). Henry
review suggested that core problem is tax / transfer arrangements that
increase overall demand (ie tax exemption of family home from capital
gains taxes; and favourable treatment of negatively geared investment).
Rental losses are deductible, but capital gains get concessional tax
treatment. 90% of negative gearing is in existing housing. Since
negative gearing was restored in 1987, the proportion of existing home
finance for investors has risen from 8% to 40%. Median house prices have
risen 3-5 time average household earnings over the past decade, and
affordability in Australia is poor by international standards. Henry
review proposes reducing income / losses on rental property by 40 % and
giving the same concession on capital gains. This would make negative
gearing less attractive - and remove the bias towards this. Henry review
suggested that it was important to boost supply (eg removing stamp
duties on first homes and reform of land tax - as well as rental
assistance for low-income households). The government has passed the
buck to the states in dealing with this. Theoretically increasing supply
will solve affordability problems- but in practice it is not that simple
(eg developers have to be willing to use land thus made available). IMF
warnings about a property bubble and Australia's high levels of property
debt suggest that the question needs to be taken seriously [1]
House prices have risen 1% per month for a year
even though housing loan approvals have fallen 15% - and this is a
puzzle. RBA suggests that this could be explained by shift from
purchases byfirst home buyers (and decline in turnover in lower priced
suburbs) and increaased activity by repeat buyers. 90% of first home
buyers have a mortgage, while only 65% of repeat buyers do so (Hurley B
'House price surge puzzles bank' AFR, 8-9/5/10)
HIA Housing Affordability Index is a work of
fiction. This suggests that first home buyers spend $500,000 on home and
can't afford this without $125,000 pa income. ABS says average borrowing
is $283,000. HIA implies that average first home buyers pay more than
median prices in most cities. Commonwealth Bank recently published data
showing many affordable locations in 10km of city centres. Index claims
that median prices rose 29% in year to March 2010 - while others give
lower figures. HIA uses index to force governments to make decisions
favourable to building industry (Ryder T., 'Affordability crisis an
industry fiction', Australian, 27/5/10)
Home loan approvals have been falling while
property prices have been increasing - and no one knows why. Some see
market driven by Asian and first home-buyers who have given up on
cheaper areas. Development companies find a strong take-up of new
product. Buyers are driving up prices of top 80% of properties by 4% per
quarter. Declines in loan approvals are due to first home owners being
priced out of the market [1].
Tax review came up with a proposal for cheaper
housing - related to the fact that big institutions steer clear of
investment housing. Small investors who come under the threshold pay no
land tax. Big investors can lose up to 30% of any rent - and this is
serious as rents are usually below institutional benchmarks anyway. The
big investors who are discouraged would be a better match with the needs
of renters who often want long term tenure. Henry review suggested
that changes to stamp duties and land tax would overcome many obstacles
to increased supply of affordable housing. It suggested replacing stamp
duties with broader land tax on every property - a proposal that the
federal government rejected [1]
The issue is complex because:
- construction costs were increased by a resources boom and
simultaneous efforts to catch up on infrastructure backlogs;
- credit was eased in international markets
States
There is no reference to state taxation in Henry vision (Syvret P.,
'The cash-flow dream', CM, 3/5/10).
A broad based tax on business cash flows could become central pillar
of state tax systems - replacing payroll taxes, stamp duties and many
other taxes. States would have four areas of taxation: land tax;
gambling taxes; congestion / motoring taxes; and cash flow taxes [1]
State governments do not have much stomach for
making their taxes more efficient - some suggestions for which were
included in Henry Review (eg in relation to payroll taxes, stamp duties
on property transactions, taxes on unimproved land values). AFTS review
suggested how states could shift from present tax system to one based on
broadly-based land tax with no stamp duties [1]
Potentially Large Environmental Costs are Being Ignored: The
Peak Oil Issue
Amongst the future issues that the AFTS Report
mentions are "deepening stresses between human activities and wider
ecosystems, globally and locally".
Such stresses will lead to significantly increased costs noting, for
example,
- widespread recognition of limits to available fresh water and soils
everywhere in the world (limits which are translating in Australia into
the development of expensive desalination plants, and into a need to
renew environmental quality in the Murray darling Basin);
- the difficulty meeting the costs of reducing greenhouse gas
emissions which many analysts believe pose serious risks of climate
change.
While such concerns are recognised in the AFTS Report (eg see Section 1.5,
p9), the Report seems to pay no attention to the apparently imminent
global peak oil event which could impose very large costs quite soon
(ie to change transport systems, and perhaps patterns of urban and
regional development, in the event that oil prices rise rapidly and
irreversibly as global production peaks). Working Notes
Mayne: Mining slug mainly hits multinationals, so who cares? US economy is strengthening - though concerns remain as a result of:
tax rises; cost of health reforms; cost-increasing energy bill;
Congressional attacks on financial sector; and possible Greek-led
economic collapse in Europe [1]
Two points to note are that:
- the federal budget had been seen to be in a structural deficit
because very generous middle-class welfare payments
had been introduced by Howard Government on the basis of
capital gains tax revenues generated by a
resources boom (see above). Furthermore large
additional expenditures (eg to counteract the effects of GFC, support
additional hospital services) were committed. However, in the context of a
pending 2010 federal election, the Government did not significantly reduce
spending, but rather proposed new ongoing taxes on resource industries to fund
it. For reason suggested below, this may not be a
sustainable approach;
- the Government's tax-resource-industries-so-that-investment-is-discouraged and
spend-in-way-that-may-support-development-of-other-industries approach
is compatible with Australia's long term goal since the 1980s of
diversification of its economy away from resource-based exports - based
on recognition that the latter tend to have both a boom-bust character
and quite low economic productivity in non-boom periods.
The resource rent tax proposed by the Henry review would provide another
lever with which to manage Australia's economy - by inhibiting the
development of resouce booms and subsequent busts [1]
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