Saturday, May 29, 2010

The proposed resources tax may be a hot political issue but how many of us know how it works?

WHO could have guessed that our main political battleground would become a tax on the profits of the mining industry? Especially when, as one analyst says, only 19 people in Australia really understand it?

So many claims and counterclaims are flying around that it is difficult for anyone to know the truth. Let's look at some of the main issues.

Why do we need this tax?

The government says the main reason is that Australians are not getting a fair return from the minerals they own. Booming demand from China and India has sent mineral prices soaring in recent years, but state-based royalties have barely risen, handing the miners huge profits not shared with the owners of the minerals: us.

Second, everyone except the Coalition agrees that a profits-based tax is a better way of taxing mining activity than royalties, which hit hardest on the most marginal mines. That's why the Henry review proposed the tax.

Third, Treasurer Wayne Swan constantly alludes to the dangers of a "two-speed economy" the mining boom pushing the rest of the economy into the slow lane, by driving up the dollar and thus making other industries less competitive, while outbidding them for scarce resources of skilled labour and capital. Yet Swan also denies that the new tax will slow mining, saying it will increase mining output. Hmm.

Deep in the background, one suspects, is an issue neither side has aired publicly: the mining industry led the campaign that derailed the emissions trading scheme. There's a hint of payback here.

How would it work?

It's complicated. But the central feature is that mining companies would be charged a tax of 40 per cent on "super profits" defined as any profit in excess of the return on the safest investment: long-term government bonds. That threshold is normally about 6 per cent.

For the miners, there are three benefits. First, the tax works both ways. Companies losing money on a mine would get 40 per cent of their losses back from taxpayers: either as credits against tax on future earnings from this or other mines, or (if they go out of business) as a cheque from the government.

Second, Canberra would repay all their state royalties (one unresolved issue is how it might stop the states jacking up royalties to profit from this). And third, part of the tax would be ploughed back into mining infrastructure and tax breaks for exploration. In effect, the federal government would become a 40 per cent partner in all mines with no say in management, but sharing the profits and losses.

But if miners support a tax like this in principle, why are they so vehemently against this tax?

Because it would reduce their profits. The miners now pay about 35 per cent of their taxable income in tax and royalties. Under the new scheme, a mine earning a 15 per cent return on investment would pay 45 per cent of that in tax, rising to 50 per cent for a 25 per cent return, and 52.5 per cent for a 40 per cent return.

The Minerals Council says miners pay 41 per cent now, rising to 58 per cent under the new scheme.

The first is poor arithmetic, the second assumes an infinitely high rate of return. But their core claim is right: these would be the world's highest mining taxes.

Second, they question whether the tax is workable. It assumes they can borrow money at the same rate as the government, which seems unlikely. And many doubt that future governments will really pay out billions of dollars in compensation to failed mines or that future taxpayers would accept this.

So do they want the tax scrapped?

No, only the Coalition wants that. The Minerals Council wants four big changes:

Reduce the 40 per cent tax rate.

Lift the threshold for "super profits".

Exempt existing projects.

Apply different tax rates to different commodities.

They contrast the new tax with the old resource rent tax on oil and gas, introduced in the '80s by the Hawke government, and designed by Ross Garnaut and Anthony Clunies-Ross. Its threshold for super profits was set 5 per cent above the bond rate (in effect, taxing only profits above 11 per cent). And it exempted existing projects including the lucrative North-West Shelf gas fields, now facing the new tax.

What's the government's response?

There isn't one, because the two sides are not negotiating on these core issues. The industry was consulted by the Henry review, but not before the tax was decided. And while a government panel is now consulting with the miners, its brief is limited to transitional issues (important, but not the main game).

Rather, the two sides are shouting at each other through the media. Swan says the 40 per cent tax rate is non-negotiable. But one suspects that, in the end, it could be negotiable if a deal is to be done.

There are hints that the government will compromise on the threshold for super profits, lifting it to the bond rate plus 5 per cent, as in the Garnaut model. That would sharply reduce the miners' prospective tax bills: for a 15 per cent return, from 45 to 36 per cent, and for a 25 per cent return, from 50 to 44 per cent.

But almost certainly, such a change would also see the government scrap its promise to compensate miners for their losses. In effect, the Henry model would be replaced by the Garnaut model.

The government is looking at exempting low-value minerals such as gravel and phosphates from the tax.

But the real sticking point is likely to be the third issue. The miners are furious the government plans to impose the tax on existing projects, sharply reducing their profitability. They angrily call it a retrospective tax, a false claim, as it applies only to future profits. But the government could back down on this only if it were prepared to scrap all the measures to be financed by the new tax: company tax down to 28 per cent, tax breaks for small business, all the improvements to superannuation. Dream on, miners!

But it's already driven down the value of our mining shares.

Only marginally. Australian mining shares have fallen by much the same as mining shares worldwide, because of the European debt crisis.

How will it end?

It might not end until after the election. The miners have a tough call to make: do they negotiate with the government now, while they have leverage or maintain their rage, and punt on a Coalition victory? The government too has a tough call. It could try to turn down the heat by dumping the Henry model for the Garnaut model, and exempting low-value minerals. But then the miners would demand more. The election could decide it. If Labor wins, they and the Greens will see the tax become law. If the Coalition wins, it won't.

What if the miners take their business overseas?

The minerals won't go overseas, so they'll be mined later by someone else. Some mines will be deferred, but that's not a bad thing. Treasury and the Reserve Bank warn that with Australia close to full employment, mining can expand only at the expense of other sectors. Who wants that?


Friday, May 28, 2010

Henry fends off (most of) his critics

KEN Henry made the most of his reluctant appearance before a Senate committee. He put down his critics, and gave a lucid explanation of his resource rent tax offset only by an own goal and one sharp senator getting through his defences.

The Treasury boss had it easy as Coalition senators virtually invited him to explain how the tax would work, why it was needed, and what were the flaws in the arguments against it.

He challenged the Minerals Council's claim that miners pay 41 per cent of their income in tax and royalties, rising to 58 per cent in the new scheme.

Yes, he said, on their taxable income but only because tax breaks for depreciation made their taxable income "a fraction of their economic income".

"It's not very meaningful," he said. "We could remove all the mining industry's tax concessions and not change its effective rate of tax calculated [that] way." Yet losing billions of dollars a year in tax breaks would be "of some significance".

And yes, under the new scheme, in theory a company could have to pay tax as high as 56.8 per cent of its taxable income. But it would do that only if its profits were "infinitely high". On Treasury estimates, only companies earning returns of more than 25 per cent a year would pay 50 per cent of their income in tax.

Henry said he knew of no decisions to change the tax, despite speculation that the government will lift the threshold for resource profits from 6 per cent to 11 per cent. But he hinted darkly that if it did, there could be other changes to claw back the revenue loss.

But he kicked one own goal, claiming that, far from the mining industry "saving Australia from recession", the truth was the reverse: mining had "quite a deep recession", yet Australia had none. Mining shed 15 per cent of its employees, he said.

Bunk. The seasonally adjusted jobs figures are not reliable at that level. They show that mining jobs rose 30 per cent in the last nine months of 2008, then shrank 15 per cent in six months, then rose another 15 per cent. How can anyone believe that when the national accounts show mining output in 2009 was basically flat, with at most a brief fall of 1.2 per cent?

Then, under persistent questioning from independent Nick Xenophon, Henry conceded that the optimistic modelling of the tax ignored the prospect that mining projects could be deferred in response to the tax, to focus on the (very) long-term benefits. "Frankly, there is more than enough investment in train in the mining sector," he said.


Thursday, May 27, 2010

Indians the new Italians in migration

AUSTRALIA has more Indians than Italians. The Indian community in this country has doubled in just six years, becoming our fastest-growing minority, new figures show.

The immigration department estimates in 2007-08 the stock of migrants from India grew more than any other country, even Britain or New Zealand.

It estimates that the Indian-born population has risen from 110,563 in mid-2002 to 239,295 in mid-2008, overtaking the Italians to become our fourth-biggest migrant community.

In 2007-08 alone, the number of Indian-born people living in Australia grew by 39,529. Some were skilled migrants arriving to take up jobs, and some arrived as students, many hoping to stay on as workers.

China was the second-biggest source, the Chinese-born population growing by 32,563. New Zealand (31,248) dropped to third place, while Britain (17,397) was a distant fourth, as arrivals were offset by the deaths or return of settlers.

The Indian population would have risen faster still in 2008-09, when the number of Indians in temporary residence here grew by 40,000 or 40 per cent. But that would have been its peak, with the department estimating that total net migration in 2009-10 would be down by more than 50,000.

In 2008-09, for the seventh year in a row, India was the biggest source of permanent settlers in Victoria. The figures show a net growth of 9004 permanent residents from India, 8034 from China, 5023 from Britain, 4472 from New Zealand and 2569 from Sri Lanka.

The British are still the biggest migrant community, with 1.166 million forming almost 6 per cent of our population. New Zealanders (494,579) were the second-biggest group in mid-2008. The Italian-born population shrank by 3427, mainly due to the deaths of postwar migrants. Italian immigration dried up in the early 1970s, but the 2006 census found 852,000 Australians claim Italian ancestry. Other communities shrinking include the Greeks (down 2835), Lebanese, Poles, Serbs, Dutch, Maltese, Croatians, Hungarians and Cypriots.



1 India 39,529 239,295

2 China* 32,563 313,572

3 NZ 31,248 494,579

4 UK 17,397 1,166,515

5 Philippines 10,784 155,124

6 South Africa 9918 136,201

7 South Korea 9118 78,260

8 Malaysia 6684 120,053


Italy -3427 221,721

Greece -2835 130,501

Lebanon -1679 89,065




Wednesday, May 26, 2010

Resources debate needs less heat, more light

THERE is no meeting of minds. There are no agreed goals. So it is no surprise that the Rudd government and the miners are in total conflict on how much tax the industry pays.

Prime Minister Kevin Rudd and Treasurer Wayne Swan tell us the domestic mining companies pay a company tax rate of only 17 per cent, and multinational miners pay just 13 per cent. (But isn't it their job to make us pay the lawful tax rate in this case, 30 per cent?).

\#\*/@!, say the miners. The average corporate tax rate paid by the mining sector is 27.8 per cent, they say. Add royalties, and its effective tax rate is 41.3 per cent. Under the government's tax, it could rise as high as 57.8 per cent.

Let's try to make sense of this. Start with the Tax Office data. It shows that in 2007-08, the mining industry paid $8.1 billion of tax on $29 billion of net taxable income.

Yep, that's 27.8 per cent, just as the miners say. That's roughly in line with the tax paid by other sectors. Why can't the government agree with that?

Well, according to a Treasury paper released by Swan's office, taxable income is not the best measure of "economic income". It notes that in 2004-05, mining accounted for 17.5 per cent of the corporate profits (to be precise, its gross operating surplus), but only 8 per cent of corporate income tax. "This result is surprising, given the start of the mining boom early in this period," it observes.

Why so low? "The industry receives generous deductions for [depreciation], including the immediate expensing of exploration expenditure, certain infrastructure expenses and site rehabilitation," the paper explains.

"These factors result in large deductions, allowing such firms to reduce their taxable income below their economic income."

OK. That is the core difference between the government's figures and those of the miners. The Treasury team constructed their own definition of "net operating income", which restored all those deductions and hey, it estimated the mining sector's tax rate was 12 percentage points lower than the average.

But it was not just mining. The electricity, gas and water sector paid an even lower tax rate. Construction, transport, communications on Treasury's measure, all the capital-intensive sectors paid lower tax rates than the labour-intensive sectors, thanks largely to their high depreciation allowances, and their ability to write off interest costs.

Is the government proposing to change those tax breaks? No.

And why did Treasury use 2004-05 data for its study? Well, by 2007-08, the mining sector's share of tax paid grew from 8 per cent to 14 per cent. In 2008-09, it would have been at least 20 per cent. It's fair to assume that Treasury used out-of-date figures because they suited the government's case.

Surely we deserve better than this. As Ross Garnaut argued last week, this debate needs less heat, more light.


Tuesday, May 25, 2010

Garnaut's got the goods on mining taxes

QUESTION 1 is whether the slump in global markets is a crisis or a correction. Are we seeing a second wave of the panic of late 2008, or just seeing investors retreat from positions that now seem too optimistic?

Question 2 is whether the resource rent tax will damage foreign investors' long-term confidence in Australia, and hence our future growth.

The two questions are inter-related. The mining companies and their supporters tell us the plunge in mining share prices is the result of the new tax. And as we all indirectly own shares in the mining companies through our super funds, we're all worse off.

Let's put the facts. When the markets closed on Friday, April 30, the Australian dollar bought US93 and the benchmark S&P/ASX200 index stood at 4807.4.

On the Sunday, the government released the Henry report and announced it would impose the resource rent tax.

The next day, both the dollar and the market index fell, but slightly, by 0.5 per cent. Over the next two weeks both slid by roughly 4 per cent. That's a fall, but no cataclysm.

The real damage came in week three. By last Friday morning, the dollar had plunged 9.7 per cent in four days and a bit, and the sharemarket by 8.7 per cent. That's a market plunge. But then they kept rising.

The important thing is that this was not unique to Australia. Sharemarkets worldwide have fallen by similar amounts over the same period. Mining stocks in the US fell by similar amounts to mining stocks here.

The Aussie dollar fell more than most against the US dollar, but there are other reasons for that.

Commodity exporters such as Australia have manic-depressive currencies: they rise higher and fall lower than the rest when the outlook for global growth changes. Back in 2008, we went from US97.86 in July to US61.22 in October. Now forecasts for global growth have fallen, with Europe facing years of slow growth and China slamming on the brakes to head off inflation.

Second, the crisis in Europe has reversed the market's bets on what the Reserve Bank will do next. A month ago it was forecasting several rate rises ahead. Now it's punting on rates staying on hold until the second half of 2011. And that has halted the carry trade, in which investors borrow in Japan or the US at low interest rates to invest in Australia.

Third, Australia plans to impose a resource rent tax on miners, reducing the profitability of mining projects. All three are factors in our falling dollar and share values. Yet Australian shares have fallen at similar rates to the rest and bank shares have fallen as much as mining shares. To me, that suggests the new tax has been only a marginal influence.

What of the future? Your guess is as good as mine, but most analysts see this as more correction than crisis, at least outside Europe.

Asia's biggest markets are growing at incredible speed: China, Taiwan, Thailand, Malaysia and Singapore all grew by more than 10 per cent in the year to March, with South Korea and Hong Kong not far behind. That momentum would take some stopping. And the Federal Reserve is forecasting US growth of 3.2 to 3.7 per cent this year. Europe alone is in trouble.

What about us? With an election looming, it's no surprise that the mining companies have put projects on hold. I suspect they will stay on hold until the election is over and (if Labor wins) the new tax becomes law, with the support of the Greens, who will hold the balance of power in the new Senate.

In the short to medium term, you'd expect that it will lead to less mining investment than otherwise. Mining Australian deposits will become less profitable, and in some cases those projects will drop down the priority list of the multinational miners. But as I have argued before, that simply defers those projects until they become more profitable. Our mineral despots will not be moved. Coal aside, they will all be mined eventually. And the government is right to demand a better return for them.

But how? A consensus is starting to form around a sensible compromise, well-expressed last Thursday in a thoughtful, fair-minded speech by Professor Ross Garnaut at the University of Melbourne. Decades ago, Garnaut and Anthony Clunies-Ross invented the resource rent tax we now use for the oil and gas industry. Garnaut is also the long-time chairman of Lihir Gold, and has worked closely with both the Rudd government and Rio Tinto. No one knows the issues better.

There is no space to summarise his speech here: for those interested, it's at Garnaut chastised his fellow miners for using emotive arguments and threats rather than logic, and upheld the government's right to impose it on existing as well as new projects.

But he also questioned Treasury's assumptions that mining companies could borrow money at the same rate as the government to finance their initial losses, and that future governments would honour the pledge to pay mining companies 40 per cent of their losses on failed projects.

A better solution, he argued, would be to use the Henry formula to tax mining exploration, and put his own long-established (and less extreme) tax on mining production. It's the logical solution. Pity they won't agree on it any time soon.


Friday, May 21, 2010

New Zealand's more relaxed take on deficit

THE New Zealand government has raised its GST rate to 15 per cent and slashed the top tax rate to 33 per cent in an attempt to reduce the flow of skilled New Zealanders to Australia.

Finance Minister Bill English, of the centre-right National coalition, announced the changes yesterday in a budget with a more relaxed attitude than Australia's, raising the deficit and anticipating no return to surplus until 2015-16.

The company tax rate will fall from 30 per cent to 28 per cent, as proposed in Australia. But property investors will lose tax breaks for depreciation and the right to use investment losses to qualify for means-tested benefits.

Mr English said cutting income taxes and raising taxes on consumption and property speculation will "drive the NZ economy forward, moving away from debt and speculation while increasing investment and exports".

His budget acted on most findings of NZ's tax review, but not proposals for a capital gains tax and tougher rules against negative gearing. The budget forecasts steady growth of 3 per cent for the next four years. The deficit would peak at $A7 billion (4.2 per cent of GDP) next year, then slowly shrink away.

NZ budget charts small, pragmatic steps towards a surplus by 2015-16

THE New Zealand budget handed down yesterday is a fascinating contrast to the debate in Australia: on tax reform, and on getting the budget back in the black.

New Zealand has a right-of-centre government, as Tony Abbott hopes Australia soon will. New Zealand has also just had an independent tax review, as Kevin Rudd and Wayne Swan have.

But there the similarities end. The Henry review proposed an ambitious reform agenda, of which very little will be implemented. New Zealand's tax review was more modest but yesterday's budget committed to implementing most of it in some form.

In Australia, Labor has adopted an austere fiscal policy to put the budget back in the black by 2012-13 and limit net debt to 6 per cent of GDP which the Coalition says is too much. But the Coalition's Kiwi allies have a far more relaxed approach. They will increase their deficit next year as we cut ours. They will leave it to 2015-16 to return to surplus, and aim to limit net debt to 26 per cent of GDP.

After 25 years in which Australia has been the pragmatic sister, are we seeing a role reversal?

New Zealand's Prime Minister, John Key, is pragmatic above all. A boy from a Christchurch housing estate, he rose to make millions as a London foreign exchange trader. Then, at 40, he came home to enter politics. Within six years he was Prime Minister, skilfully heading an improbable coalition of his National Party and three small allies.

Bill English, his Finance Minister, is a commonsense conservative from the Southland who gave up sheep farming for economics, then politics. In their lifetimes they have seen New Zealand slide down the economic rankings, partly due to six years of too much ideology, followed by 17 years of too much caution.

The diagnosis English gives of New Zealand's problems is the same as was given a decade ago by his Labor predecessor, Michael Cullen: too little research, innovation and exports, too little saving, too much debt and property speculation and too much emigration of its best and brightest, above all to Australia.

"New Zealand's largest single vulnerability is now its large and growing net external liabilities," English said yesterday. "New Zealand owes the world $NZ168 billion ($A135 billion), or around 90 per cent of its GDP." (Australia owes 61 per cent).

"The government is committed to policies that will reduce our vulnerabilities by tilting our economy away from debt and consumption towards savings, investment and exports."

Yesterday's tax changes are meant to drive that. They will:

Cut all income tax rates to a four-tier scale: 10.5 per cent (low incomes), 17.5 (low-middle), 30 (upper-middle) and 33 per cent (upper, although cutting in at just $A57,000).

Lift the GST rate from 12.5 per cent to 15 per cent. Low-income households will be compensated by a rise in pensions and benefits to match the 2 per cent lift in inflation.

Cut the company tax rate from 30 per cent to 28 per cent.

End tax breaks for depreciation of rental housing, and stop investors using their losses to qualify for means-tested benefits.

Invest $A260 million in new science, research and technology programs, $A1.2 billion on new rail and other infrastructure, and $A1.1 billion in education.

But Key and English rejected more radical proposals from their tax review, headed by Victoria University (Wellington) economist Bob Buckle: a capital gains tax (NZ still has none), including on the family home, and tough moves against negative gearing, by taxing landlords on an imputed rate of return.

Are yesterday's tax changes the catalyst that will change New Zealand's culture from speculation to innovation? Or just the latest in the series of minor reforms we saw from the Bolger and Clark governments, leaving the culture unchanged? Surely the latter.

On the budget, unlike their Australian counterparts, Key and English are in no hurry to return to surplus. Next year the underlying deficit will rise to 4.2 per cent of GDP (as against 2.9 per cent here), then gradually decline into surplus by 2015-16, by which time NZ's net public debt would have risen to 26.5 per cent of its GDP.

That's hardly Greek or US levels, but by then Australia's net debt would be almost zero. You can't change the culture this way.

Thursday, May 20, 2010

Savings not as big as they seem

THE list of savings measures unveiled yesterday by Coalition finance spokesman Andrew Robb adds up to almost $47 billion. But the net savings to the budget would be far less.

Of the $46.7 billion in proposed savings, only $7.3 billion over four years would be a clear saving on the budget's bottom line.

The rest of the savings are on the capital account, or on programs to be replaced by new programs, yet to be unveiled.

Of those clearly labelled bottom-line savings, 80 per cent of the gains would come from cuts to the public service ($4.4 billion) and climate change programs ($1.5 billion).

How come? First, almost half of the $46.7 billion would be saved from capital spending, not routine outlays. That includes $18 billion saved by not building the national broadband network, and $4 billion from selling Medibank Private.

But they don't count directly in the budget bottom line, just indirectly through reducing the interest bill. In Mr Robb's figures, his bottom-line savings would be $24.7 billion.

But that's also misleading. Almost half of the savings, $11.8 billion, would come from scrapping the new 40 per cent resource rent tax and all the measures it would fund: company tax cuts, the boost to superannuation, tax cuts for savers, etc.

On Treasury's estimates, that would actually cost money: the resource rent tax would raise more than that. So at best, that leaves $12.9 billion of potential bottom-line savings.

But that's too much too. Of those savings, almost half come from five programs to be replaced by new programs. Mr Robb said some of the replacements would cost more, some less. They include the national broadband network, the skills training program, the trade training centres, computers in schools, and funding to improve teacher quality.

Well, when they tell us about the new programs, we can judge the savings, if any. For now, leave them out.

That leaves just $7.3 billion of cuts to recurrent spending, $4.4 billion of it from a two-year hiring freeze and other cuts to the public service.

Just $2.6 billion of the savings come from program cuts. Of that, $1.5 billion is from scrapping seven programs to tackle climate change, three of them to help poor countries barely above sea level, such as Tuvalu and Bangladesh, to adapt to rising seas.

What is left of the Green Car program would be cut in half, saving $278 million. The e-health initiative would be scrapped ($467 million) along with the GP super clinics ($355 million).

But wait, Mr Robb says: there'll be more.

Tuesday, May 18, 2010

Swan's budget numbers hide ugly reality

TALK to economists and they will probably tell you Wayne Swan brought down a responsible budget that will get Australia back in the black ASAP. And they're right.

Most will also tell you that the resource rent tax is a good idea, in principle, and the threats by miners to abandon Australia can be safely ignored. Once the tax is in, they'll be back, wherever there are profits to be made.

The economists are right on that, too. Yet I've got doubts: not about the broad strategy of the budget or the resource tax, but about their detail.

My concern with the budget is its lack of transparency. For example: buried deep in the budget, unannounced, was a new tax on LPG. In 2004, the Howard government decreed that from July 1, 2011, LPG would be taxed, rising in five steps to 12.5 a litre by 2015.

We can argue the merits of that. But it reflects no credit on the Howard or Rudd governments that nothing more was said on it. So last week it came as a surprise to motorists who have converted their cars to LPG, believing it would remain tax-free.

Then there is the cover-up to disguise the ugly reality that it was only by axing the emissions trading scheme that Labor in 2012-13 will meet its pledge to limit the growth in real spending to 2 per cent.

To hide this, the budget papers changed the way free permits are valued. And Finance Minister Lindsay Tanner refused requests by The Age to make public the year-by-year savings in cash outlays from scrapping the ETS.

Nothing has cost Labor and Kevin Rudd more political capital than their amoral, cowardly decision to abandon the ETS when the option of a double dissolution meant the door to implementation was wide open. Even among those still supporting Labor, the latest Age/Nielsen poll found, disapproval of Rudd more than doubled in a month.

But what no one has pointed out is that the inflexibility of its 2 per cent cap on real spending growth left Labor in a no-win situation.

The ETS itself would have been only a minor contributor to the budget deficit: $652 million over five years, once revenue and spending are netted out. The problem is that it would get there by raising billions from selling permits and then spending billions on compensation, for households and industry alike.

On the figures in last November's budget update, the ETS would have raised spending by 1.2 per cent in 2011-12, and a further 1.9 per cent in 2012-13. If inflation is 2.5 per cent, then the limit for spending growth in current dollars is 4.5 per cent. But five of the top eight areas of budget spending are forecast to grow well above that rate: GST payments to the states (up 5.1 per cent in 2012-13), age pensions (7.6), public hospitals (8.0), Medicare (6.5), and aid to private schools (7.9). Add all that to the ETS, and it just couldn't fit in the spending cap.

The cap was unrealistic. The right policy decision was to redefine it, and keep the ETS. Instead, Rudd kept the cap, and scrapped the ETS. Why?

Turn to the resource rent tax, and one thing is clear. Apart from Tony Abbott, everyone supports it in principle including the Minerals Council, whose submission to the Henry review proposed it as a replacement for state royalties. But the details matter, and that's what the fight is about.

The miners oppose four aspects of the tax:

The 40 per cent tax rate.

The choice of the long-term bond rate (6 per cent or so) as the threshold for "super profits".

Its application to existing projects.

The lack of different tax rates for different commodities.

A comparison with the existing resource rent tax on oil and gas is useful. It, too, is 40 per cent, with no differentiation by commodity. But it excluded existing projects, and its threshold for super profits was the bond rate plus 5 percentage points (that is, 11 per cent or so).

Government sources point out, however, that the new tax also offers miners benefits the old one doesn't have. The government's 40 per cent stake will cut both ways. If miners lose money in any year, they will get 40 per cent of it back, as credits against tax either on future earnings or on profitable mines elsewhere. Canberra would pay their state royalties. And one dollar in six the tax raises will be ploughed back as mining infrastructure or tax breaks for exploration.

It is almost as though the government's aim is 40 per cent nationalisation of the industry, but without claiming any say in management. I find it puzzling that Labor chose this model over the simpler, well-established model of the old tax.

The authors of the tax see it as a virtue that the tax works to encourage the development of marginal mines. To me, that's a negative.

What makes mining different is that each asset can be mined once only. We know the world will slowly run out of minerals. That means our mineral assets will be worth more in future than they are now.

There is no public benefit in mining them now. There is even less benefit when the mines are marginal now, but would be highly profitable if we waited.

The old tax, applied to new and existing mines, would be a better model.

Saturday, May 15, 2010

ETS axing put budget in the black - scrapped scheme kept lid on costs

THE Rudd government would have broken its self-imposed cap on spending growth without the money it saved by scrapping its emissions trading scheme, the budget papers reveal.

Amid a patchwork of conflicting budget figures, definition changes, and the deliberate withholding of data, an Age analysis found that scrapping the ETS made the difference in the Rudd government meeting its spending cap.

The budget papers show that in 2012-13, even on the smaller of two very different sets of budget numbers, the emissions trading scheme would have added $7.1 billion to spending.

That would have lifted real spending growth in that year on the accruals measure in which all detailed budget information is given from 2 per cent to 2.9 per cent.

As the central pillar of its strategy to return the budget to balance as soon as possible, the government last year pledged to temporarily restrain growth in future outlays to 2 per cent in real terms.

But with spending on age pensions alone set to rise $3 billion in 2012-13, hospitals spending $2.1 billion, GST payments $2 billion, and infrastructure works by $1.7 billion, the government was clearly on track to blow that cap without big spending cuts.

The ETS eventually became that spending cut. When the government included the ETS in future budget estimates last year, its spending measure included the cost of free permits for electricity producers and what it called "emission-intensive trade-exposed industries". Its budget update last November said ETS spending in 2012-13 would be $11.8 billion.

A similar number was implied in a release on budget day by the Department of Climate Change and Energy Efficiency. It put the five-year saving in spending from scrapping the ETS at $30.6 billion.

But budget paper two, issued the same day, showed the saving in precisely the same period as just $18.3 billion. Sources say the difference was because it was decided that the cost of free permits by then, almost $5 billion a year should not be counted as spending.

Access Economics director Chris Richardson told a business luncheon yesterday that while the ETS was not scrapped for budgetary reasons, its abolition aided the budget.

"If they didn't get rid of the ETS, their spending would have bust the 2 per cent cap," Mr Richardson told the luncheon. "And if the ETS comes back, some spending needs to be junked to remain within its cap."

The government yesterday declined to respond. But officials noted that this year's budget papers defined the spending cap as applying to cash spending, rather than the accruals measure.

But the budget papers do not spell out the year-by-year cash savings from scrapping the ETS. Finance Minister Lindsay Tanner refused repeated requests from The Age this week to make the figures public.

Meanwhile, Tony Abbott's proposal to cut public service numbers through a two-year hiring freeze has outraged bureaucrats, who say staff reductions would affect essential services.

In his response to the budget, Mr Abbott this week said the coalition would save $4 billion by not replacing 12,000 public servants who retired or resigned. The Community and Public Sector Union's Nadine Flood said "every time someone leaves the public sector, their work stops getting done". And Andrew Podger, a former public service commissioner, warned the proposal would leave a staffing gap that would last up to a decade.



2010-11 0.5% 0.5%

2011-12 0.3% 1.1%

2012-13 2.0% 2.9%

2013-14 1.9% 1.9%


Friday, May 14, 2010

40% of minerals go to the nation - REALITY CHECK

THE modesty of Tuesdays budget has put the spotlight where the government wants it to be: on the one big reform it accepted from the Henry report, putting a resource rent tax to mining.

Kevin Rudd and Wayne Swan say they are imposing the tax because Australians are not getting a fair share of the wealth generated from mining their resources. They believe most voters will ultimately rally to that cause rather than identify with the mining companies.

But the polls to date have shown the nation divided, with serious damage to Labor in Western Australia. Rudd and Swan have struggled to explain clearly why the tax is needed, why it has been designed as it has, and what impact it is expected (or intended) to have.

Questions about the tax are growing daily with the misinformation flung around by both sides. Lets try a few.

Why is it needed?

The government says mining companies have pocketed huge gains from soaring prices, but state government royalties have remained low. By 2008-09, pre-tax resource profits had soared by more than $80 billion in nine years, yet only $9 billion extra went to taxpayers in royalties.

But the miners say this ignores the far greater sums they pay in company tax and other taxes. In 2008-09, they say, miners paid $25 billion in taxes, making them the highest-taxed industry in Australia. The government has failed to spell out why mining should be taxed more than other industries.

Nor has it explained that what the tax does is give Australians a 40 per cent stake in the mining of their resources in good times and bad.

The tax is double-sided, so that not only would mining companies making money pay over 40 per cent of it to the government, but mining companies losing money would get 40 per cent of their losses back from the government.

How much will the tax cost?

This is where it gets complex. The 40 per cent tax would be charged on super profits, which are defined as profits in excess of the 10-year bond rate (currently 5.5 per cent, which serves as the benchmark of a risk-free return).

The Minerals Council, opposing the tax, quotes a hypothetical example of a (very small) mine generating $300 of revenue, with $195 of expenses. Assume a 5 per cent bond rate, and its super profit is $100.

It pays a 5 per cent royalty, which takes $15. The federal government would refund the $15 royalty but take $40 with the resource rent tax, leaving a pre-tax profit of $60. Company tax would take $17 of that, leaving a total split of $43 for shareholders and $57 for governments. They say thats the highest tax rate on mining in the world.

Any benefits for miners?

Miners benefit in three ways. The aforementioned repayment of 40 per cent of their losses, usually offset against future taxes. It would in effect pay their state royalty taxes. And it would return part of the tax through a tax break for exploration.

What would be the net impact?

The government has muddled its messages. On one hand, Rudd and Swan have implied the tax would help to rebalance the economy, so that sectors suffering from the dollars mining-driven rise manufacturing, farming and tourism would have better prospects ahead. But that would happen only if mining activity declined.

The governments modelling, by economic consultant Chris Murphy of KPMG Econtech, finds that the long-term impact will increase mining activity by 5.5 per cent, or 6.6 per cent including the cuts in company tax.

They cant both be right.

Treasury secretary Ken Henry sharply rejects the Minerals Councils claim that the tax is intended to slow the mining sector, pointing to the modelling. But Treasury and the Reserve Bank agree the strength of the mining sector is pushing up interest rates and the dollar, making life harder for everyone in the rest of the economy.

But wouldnt the mining move offshore?

Only if Australias mineral deposits moved offshore.

Wednesday, May 12, 2010

Swan backtracks on promise and cuts $1.1 billion from forward estimates

THE Rudd government has ripped more than $1 billion out of its forward estimates for Australia's foreign aid program, targeting development assistance to take the second-biggest cut of this budget.

Three years after pledging to increase Australia's development aid from 0.28 per cent of national income to 0.5 per cent by 2015-16, the government admitted in the budget papers that it has only got to 0.31 per cent so far, and plans to reach only 0.35 per cent by 2012-13.

While the Government says it remains committed to reach the target, it has now left more than two-thirds of the distance to be covered in the second half of the trip.

The budget papers reveal that $1.1 billion will be cut from the forward estimates of the aid budget over the next four years, including $270 million in 2012-13 providing a quarter of the surplus in that year.

The aid budget will still keep growing, with spending in 2010-11 forecast to grow 9.1 per cent in real terms, after being held flat in 2008-09.

Programs in individual countries will grow from $2.38 billion to $2.65 billion. The biggest increases will be in aid to Afghanistan, which will double to $106 million to pay for an increased Australian police role and improve the Afghan government's capacity to deliver services.

Development programs in Africa will grow almost 35 per cent, and there will be a similar rise in funding for a range of global programs to tackle humanitarian needs, develop human rights, support business projects and develop local leadership.

Indonesia ($459 million) and Papua New Guinea ($457 million) will be the two biggest recipients of Australia's aid, followed by the Solomon Islands ($226 million), Afghanistan ($123 million), Vietnam ($120 million) and the Philippines ($118 million).

Foreign Minister Stephen Smith said the aid budget would reach 0.42 per cent of GDP by 2013-14, the last year of the forward estimates. "Australia is doing its bit to help developing countries achieve the global Millennium Development Goals by 2015," he said.

We are the envy of the world

GOOD resolutions make for boring budgets. The big story in this budget is not what it does, but what it doesn't. It doesn't have tax cuts. It doesn't have much new spending. It doesn't even have much in spending cuts.

In Treasurer Wayne Swan's words, the budget "produces an economic and fiscal position the envy of the developed world".

This budget doesn't give and it doesn't take. More than any other budget I've seen, it leaves things as they are. And that's the reason it is able to forecast a return to surplus by 2012-13, three years earlier than previously forecast.

Leaving things as they are delivers two benefits to the bottom line. First, it means stimulus spending programs are allowed to run out without being replaced. That's the main reason Canberra's spending as a share of GDP is forecast to shrink from 26.2 per cent of GDP now to 23.8 per cent in 2012-13.

Second, leaving things alone means there are no tax cuts and so bracket creep brings home the bacon. Taxes will rise from 20.2 per cent of GDP to 22.5 per cent in the same three years, primarily because incomes will rise but income tax thresholds will not. Without any formal tax increase, Australians will pay a higher share of their income in tax.

Income tax on individuals, now at a 40-year low as a share of GDP, is forecast to climb from $120 billion this financial year to $174 billion in four years a rise of 45 per cent. Part of that is because we are forecast to have almost a million more jobs by then. But the main reason is that our wages are forecast to rise roughly 4 per cent a year, and with no tax cuts apart from the long-scheduled nip and tuck from July 1, that means with each year a higher share of our income is in our highest tax bracket.

Unfair? No, I think that's very fair. It's in our interests to get the budget back in the black as soon as is feasible, and anyone who says we can do it just by cutting spending should spell out where he (it's usually guys sounding off this way) would cut another $36 billion a year from spending. I'll bet it's not from spending on him or the interest groups he represents.

In fact, with GDP itself forecast to grow reasonably fast 28 per cent in those four years, or 14 per cent excluding inflation that would still leave the taxman taking just 10.5 per cent of GDP off us in personal income tax in 2013-14. That's well below the 25-year average of 12 per cent of GDP from 1980 to 2005.

The return to growth would see company profits soar, so tax on them would rise 47 per cent in four years. And the proposed resources tax on the miners would add its bit, though mostly after we are already back in surplus.

The bottom line in all this is the Rudd government's political calculation that it is more vulnerable to attack for spending too much than too little, so it has made restoring the surplus its first priority. Everything else can wait.

There is no money in the forward estimates any more for an emissions trading scheme not even in 2013. It is now government policy in principle only, with no commitment to putting it into practice.

There are a few fiddles here. To make the coming year's budget deficit look smaller, Team Rudd has pulled $1.5 billion of grants for roads and local government into the dying weeks of 2009-10, exaggerating the improvement in next year's budget balance.

It has ripped more than $1 billion out of the forward estimates for foreign aid. While it is still committed to lifting Australia's development programs to 0.5 per cent of our national income by 2015-16, more than two-thirds of the work has been left for the last four years. One may well ask whether that is another Labor promise halfway to being abandoned.

The biggest budget saving, apart from abandoning emissions trading, is $1.9 billion saved by slashing payments under the Pharmaceutical Benefits Scheme to manufacturers.

The Government has also cut $840 million from its future superannuation co-contributions for lower-income earners. Does it see the scheme now as a bit of rort for the families of the well-off?

But that's all the bad news for ordinary folk. What about the good news?

Well, that's the problem. There's really not much positive news to take out of this budget, apart from the fact that, in an election year, it is a very restrained document that sets Australia up to be back in the black by 2012-13. That is its real achievement.

The budget completes the government's response to the Henry review by introducing a 50 per cent discount on up to $1000 of interest income from bank savings, and by allowing ordinary taxpayers to opt for a standard $1000 tax deduction for work-related expenses without having to fill out all the details.

Given that the average work-related expenses are about $2000 per taxpayer claiming them, that offers a good deal for people who make small claims, while leaving those with bigger expenses to keep filling out the forms.

The savings tax break is a good first step towards Ken Henry's goal of levelling the playing field for taxation of savings, but it is just the first step. A discount rate of 50 per cent, applied to investment income and losses alike, would go a long way to improve the taxation system.

By halving the tax break for negative gearing, it would also greatly improve the Australian housing market, incentives for productive investment, and the prospect of younger and less wealthy Australians being able to own their own home.

In ruling out reform, Labor has failed hundreds of thousands of people who voted for it.

The best thing about this budget is its restraint.

By refraining from tax cuts or new spending, Labor has allowed fiscal policy to play its part in getting policy settings back to normal. That will relieve the pressure on interest rates, and maybe our overexcited Reserve Bank now will also settle for a bit of welcome restraint.

Tuesday, May 11, 2010

On average, a beautiful set of numbers for Abbott

IF THE weekend's Age/Nielsen poll numbers are right, and the swing against Labor is uniform in all seats, then an election today would install Tony Abbott as prime minister.

More than that. On these figures, the Coalition would win all 15 seats in Western Australia. The Greens would win their first seat in the House of Representatives, unseating Finance Minister Lindsay Tanner in Melbourne.

He would not be the only senior minister thrown out. With Labor's support in the west down to just 25 per cent, Foreign Minister Stephen Smith would be turfed out in Perth.

Of course, it's just an opinion poll. And anyone who remembers opinion polls knows we've been here before. In 2001, and again in 2004, John Howard was trailing in the polls at this stage. He won the elections.

But then, he could spend his way out of trouble. Labor can't.

Nielsen pollster John Stirton cautions that a poll this size has a margin of error of up to 2.6 per cent. That could yield a wide range of outcomes. As Michelle Grattan wrote yesterday, on these numbers the election result is too close to call.

But this was not a rogue poll. Of five polls conducted in May, four have found the Coalition polling at least 50 per cent of the two-party vote. And Labor has more voters in very safe seats, so a 50-50 split of votes tends to mean the Coalition wins most of the seats and government.

Assume a uniform swing in each state and, on these figures, Labor would lose 18 of the 88 seats it notionally holds after the redistribution.

It would be left with just 70 seats of the 150 in the House of Representatives, while the Coalition would win 76, with three independents and one Green. Mr Abbott could govern with the narrowest of majorities.

Who are the voters deserting Labor? For a more reliable picture, we have aggregated numbers from the past two Nielsen polls, and compared them with the same polls a year ago.

The swing against Labor has been massive: 7 per cent on primary votes, and 4.5 per cent in two-party terms. But the swing to the Coalition on primary votes has been just 2 per cent, with the Greens picking up 3.5 per cent and independents and minor parties the other 1.5 per cent.

The polls show the anti-Labor swing is almost universal. Only the 18-24 age group is moving the other way. But it is stronger in the resources states than in the south-east, stronger among women than men, and stronger in the cities than in the rest of the country.

The swing has been most intense of all among the 25 to 39-year-olds, the age group whose aspirations to home ownership have been assaulted by soaring house prices and interest rates. A year ago, 59 per cent of them backed Labor after preferences. Now, only 52 per cent of them do.

Geographically, the biggest hit has been in WA, where Labor's primary vote, even averaged over two polls, has slumped to 30 per cent, down from 42.5 per cent a year ago. After preferences, it is down from 49 per cent to 43 per cent.

The swing in Queensland is almost as bad, down 5.5 per cent in a year, although a year ago, Queensland was Labor's strongest state.

In NSW the swing is 4.5 per cent, while in South Australia the damage has been minor. In Tasmania and the ACT, the numbers polled are too small to be reliable, but they look horrible for Labor.

In Victoria, Labor's primary vote has slumped 6.5 per cent in the past year. Most of that has gone to the Greens, cutting the two-party swing to 3 per cent. Even so, the Liberals would reclaim Deakin and Corangamite, while the Greens would take Melbourne.

The other surprise is that the gender gap is back. A year ago, men and women as groups voted the same, but in the past two polls, men have come down 52-48 for Labor while women have opted 51-49 for the Coalition.

Those who thought Tony Abbott was a turnoff for women were wrong.





NSW Down 8 Down 4.5

Victoria Down 6.5 Down 3

Queensland Down 8.5 Down 5.5

WA Down 12.5 Down 6

SA/NT Down 6 Down 1.5


Male Down 6.5 Down 3

Female Down 8 Down 6



Friday, May 7, 2010

Greek lesson in the perils of overspending

THE fatal riots in Athens reflect the vast gulf in how the Greek financial crisis is seen at home, and in the world. Greeks, by and large, are outraged by the cuts and reforms thrust on them by their government, the European Community and the International Monetary Fund. "It's not fair!" they insist. "Why are they doing this to us?"

To outsiders, it's all too clear. Greece has been living beyond its means for years, borrowing heavily from the rest of the world and, until recently, fudging its books to hide the reality. The financial markets no longer trust it, and will not lend to it or roll over debt, except at prohibitive prices. That's what happens when you push your luck too far.

The facts are simple. Last year, Greece ran a budget deficit equivalent to 13.5 per cent of its gross domestic product (compared with 4.1 per cent in Australia). Its gross public debt was 115 per cent of GDP (as against 16 per cent in Australia), and rising rapidly. And the banks would not lend more.

How did it get there? Take its pension system. Greeks can retire early on a lifetime pension equivalent to 80 per cent of their final salary, and indexed to match wage growth. They receive 14 months a year of pension payments, with bonuses at Christmas and Easter. The OECD estimates that some Greeks actually receive more on the pension than they did when they were working.

In Germany, which underwent bruising pension reforms in the mid-2000s and now finds itself unwillingly funding 30 per cent of the EU's bailout for Greece, top-selling tabloid Bild went to town. "Why do we have to pay Greece's luxury pensions?" its front-page headline demanded last week, alongside a photo of an elderly Greek pensioner it said was paid $A5000 a month.

Greece, it told readers, is "the land of bankrupts and luxury pensions, tax dodgers and rip-offs. It's a country where the authorities use satellites to search for houses with swimming pools, in order to send the owners a tax bill." It reported that Greeks on average paid almost $A2000 a year in bribes, and shops routinely refused to provide tax receipts for purchases.

And that is part of the story. Greece joined the European Union, joined the euro, but never became part of that northern European culture in which officials, taxpayers and citizens obey the law because they see the state as theirs. In Greece, tax evasion and corruption are rife. Transparency International's annual index finds investors rate it the most corrupt country in the developed world, worse even than Saudi Arabia and Ghana.

And change is not coming easy. American-born Prime Minister George Papandreou, elected last October, has taken a series of courageous decisions to admit the true state of Greece's finances, and impose cuts and reforms across the board to reduce the deficit from 13.5 per cent of GDP to 3 per cent within three years.

Pensions have been frozen, and in some cases cut. Early retirement has been abolished. The public sector will hire no new staff in 2010, except for essential positions. Some 10,000 qualified applicants have been turned away. From 2011, hiring will resume, but only at the rate of one public servant hired for every five who leave. Contract employees will be terminated, overtime payments have been cut by 30 per cent, bonus payments and salaries have been cut, and public sector wages reduced overall by 10 per cent in the government itself and by 13 per cent in its enterprises.

But Greeks have rebelled, with a poll finding 51 per cent vowing to fight the cuts. At one end of society, the Athens rioters demand that the rich should pay, not them. At the other, London real estate agents Knight Frank report that 6 per cent of all purchases of London properties for more than £2 million ($A3.2 million) in recent months have been by Greeks shipping their money out of the country.

The biggest risk is that nervous markets are now losing confidence in the other heavily indebted, high-deficit countries of western Europe. Spain, Portugal and Ireland form the new frontline of countries that could be forced to replay the Greek tragedy.

It's a great case study for fiscal prudence.

Thursday, May 6, 2010

State Treasurer puts hand on heart: no poll war chest

VICTORIAN Treasurer John Lenders has pledged "hand on heart" that the state government will not use its $4.4 billion of forecast budget surpluses as a war chest to fund new spending in the coming election campaign.

In an interview with The Age, Mr Lenders insisted that the government would stick to its commitment to fund all infrastructure spending within the budget sector out of the surplus by 2013-14 — reversing the increase in state debt.

"I will put my hand on my heart and say, categorically, that these surpluses are to fund the infrastructure program," he said. "We're not going to put our debt levels up further."
He said the government had increased its borrowing to finance more infrastructure projects and keep the construction industry going during the slump in commercial building.

While the budget adds a further $3.8 billion in infrastructure projects, these are all paid for by stronger-than-expected state revenues.

Mr Lenders defended the proposed 40 per cent cut in infrastructure spending over the next four years as returning asset investment from its current record level down to "historically high levels", adding: "We said that the increase in borrowing would be a temporary thing."

He ridiculed the Coalition's criticisms of the increase in state debt, which on the widest measure will rise from $10.7 billion last June to $32 billion in 2014, or 8 per cent of gross state product.

"In 1958, the year I was born, state debt was 58 per cent of our economy — and that was under Sir Henry Bolte," he said. "This year it went up to 5 per cent."

At a business breakfast earlier, Mr Lenders defended the government's decision to scrap its $2000 top-up grant to first home buyers purchasing existing homes.

He said grants helping people build or buy new homes would also help relieve the housing shortage and hence pressure on rents.

In his interview with The Age, he also hinted strongly that the state's controversial $536 million fire service levy on insurance premiums would be scrapped, to be replaced by some form of property charge.

While reiterating the state's willingness to work with the Commonwealth for tax reform, Mr Lenders said the real issue was to find acceptable alternatives. "Everyone would identify the fire services levy as an inefficient tax, but for us, the question is: what would replace it?"
Earlier at the business breakfast, he appeared to undercut the case for the 1900 extra police the government has pledged to hire, ruefully highlighting the fact that crime rates had fallen by 25 per cent.

But he told The Age the community wanted more police so they could feel safe.
"If it's late at night, and there's a number of people around with a bit of grog in them, the fact that crime rates are down 25 per cent doesn't remove the anxiety you or I feel in walking past them," he said.

Wednesday, May 5, 2010

Victoria - cashed up and ready to spend

IN A budget of few surprises, the real surprise is that Victoria's finances have come through the recession in such good shape. In the downturn, it spent more than ever before. And in the upturn, it plans to spend even more and yet end up with a much bigger surplus.

It is worth looking at how this happened. It illustrates more than mere budget numbers, but says something about what is happening to life in Victoria, and its system of government.

We might have thought that the recession, even if it was much smaller than expected, would reduce state revenues. And indeed, in 2008-09, state taxes did fall marginally, partly because the budget had given away tax cuts in the expectation of a normal year, which then turned out to be anything but normal.

But even in 2008-09, total state revenue increased by 5 per cent, because the falls in state taxes were outweighed by a 10 per cent rise in grants from Canberra: partly through a steep rise in Victoria's share of GST revenues and partly through the Rudd government lifting tied grants for schools, hospitals and transport infrastructure.

What about 2009-10? It's turned out to be a boom year for Victorian government finances. Total revenues are now forecast to rise 11.4 per cent. Most of that is coming from Canberra, with total Commonwealth grants up more than $3 billion, or 17 per cent. But state tax revenue is also estimated to grow by $1 billion, or 8 per cent, despite payroll tax receipts turning out weaker than expected.

Why? Treasurer John Lenders is a beneficiary of the boom in housing prices, even as it has killed off young Victorians' hopes of owning their own home. This year, stamp duty revenue on property transactions is expected to rise by roughly $700 million, or 25 per cent, in line with Melbourne's soaring prices.

Should the government cut the tax rates to make housing more affordable? No. There is a case for cutting them in a price slump, but when prices are soaring, experience suggests measures that give people more money to spend whether cuts in stamp duty or rises in first home buyers' grants would flow straight into even higher prices. What Lenders has done instead is very sensible. From July 1, the state's $2000 top-up for first home buyers purchasing existing homes will end, and the government instead will target all its resources on boosting the supply of new housing, lifting the total grant for people building or buying new homes to an impressive $20,000 in Melbourne and $26,500 in regional areas.

In effect, all the state's housing boost is now going into boosting supply, not demand. It is a lesson for Lenders' federal counterpart, Wayne Swan, who wants to keep giving out $5 billion a year of tax breaks to negatively geared investors and more than $1 billion to first home buyers, which boosts demand while doing nothing for supply.

On payroll tax, the extraordinary weak revenues up just 1.1 per cent in a year when the Bureau of Statistics shows Victoria adding 104,000 jobs is kind of stunning.

Maybe a lot of the jobs growth has been in small business or the public sector, which don't pay the tax. Maybe there has been a big rise in tax evasion. Or maybe the bureau's figures, based on a sample of households, seriously overstate how well Victoria has been doing.

What of 2010-11? The budget forecasts more moderate revenue gains. Commonwealth grants are tipped to rise only 3.5 per cent as stimulus programs run down. State taxes are expected to climb 7 per cent, with housing prices flattening out but the boom's impact on land values lifting land tax 12 per cent, while payroll tax collections grow 6 per cent.

Put it all together, and since 2006-07, state revenues will have grown by $11 billion, or 31 per cent, in three years. Frankly, it's not too hard to be a state treasurer when you have that sort of money flowing in. You can boost services across the board, boost investment across the board, and still lock up a decent surplus on your bottom line. And that's what Lenders has done.

Hospitals last year overtook schools as the main recipients of state spending, and with all that extra money flowing from Canberra, this budget entrenches that. Of $3.1 billion of new funding over the next four years to provide government services, $855 million, or 27 per cent, is for health, overwhelmingly for hospitals. Of $10 billion in new funding for capital assets announced in the past year, $2.3 billion is to build or renovate hospitals: $1.1 billion for the Parkville cancer centre alone.

To fund this asset spending, the state expects to increase its total debts from $10.6 billion at mid-2009 to $26 billion by mid-2014. Net debt would rise from $5 billion to $16 billion in that time when on these figures it would flatten out at roughly 4 per cent of gross state product. The wider measure of public sector debt would grow from $10.7 billion now to $32 billion in 2014, when it too would level out at about 8 per cent of GSP. That's a level that does not worry the ratings agencies, as they made clear yesterday in reaffirming Victoria's AAA credit status. It should not worry anyone except debt obsessives.

What does worry me is that it would level out only because the forward estimates suggest net investment in fixed assets will slump from $6.4 billion next year to $3.9 billion in 2013-14. By then, all investment for tomorrow would be financed by taxes on current taxpayers.

That's a formula that bows to the Coalition's scare campaign against taking on debt to finance capital works. But business constantly takes on debt to finance its new investment. If the benefits of the investment outweigh the cost, what's wrong with borrowing to invest?


Monday, May 3, 2010

Sands of politics drift over the hard bits

THE Henry report has drawn up a vast agenda of potential reforms to our tax and welfare system. From that, the Rudd government has delivered one big reform, one small one, and a third which Team Henry opposes.

That was predictable. The Government agreed to the tax review under prodding from business and the 2020 summit. But it was never willing to take on a big tax reform agenda as Bob Hawke and Paul Keating did in 1985, or had a political strategy to deliver one.

What we've got instead is classic Rudd: a package to deliver benefits to the many, paid for by taking money from the top end of town, with the rest of Henry's reform plans either shelved or ruled out.

Treasurer Wayne Swan excuses this by describing Henry's work as a 10-year reform agenda. But most governments don't survive that long. If they do, new topics take over the stage, and unfinished business gets pushed aside.

Swan has flagged two more reforms, to reduce tax on income from savings, and to relieve us of the need to fill in a tax return. The risk is that, with these marketable parts of Henry's plans delivered, the more difficult bits will end up buried in the sands of politics.

Labor's big reform extending the resource rent tax to mining is fine in principle. Mining is not like other industries. A factory, a farm, a shop or an office can keep adding value to the economy indefinitely. Mining is one-off. It generates income by depleting the nation's capital our stock of mineral assets.

There's nothing wrong with that. There's no point in leaving assets in the ground. But apart from coal, there is no risk that our minerals will be left in the ground. They will be mined some day, and if that is 20 years away, logic suggests they will be more valuable then than now. There is no benefit in mining them now rather than later.

As Rudd and Swan argue, those assets belong to the Australian people. As they can be mined only once, we are entitled to a good return. You can argue over whether 40 per cent is the right rate, but this is the right tax.

It would be even better if the money was channelled into a long-term infrastructure fund, so that one form of the nation's capital wealth is used to create another. But only a bit of it is going to infrastructure, while the rest will pay for increased superannuation, cuts to the company tax rate, accelerated depreciation for small business and probably for cuts to taxes on savings, yet to be unveiled.

The government says the cut in company tax from 30 to 28 per cent of profits will make non-mining business better off. Not by the time their superannuation guarantee payments are lifted from 9 per cent of wages to 12 per cent, it won't.

Back in 1995 Paul Keating's plan was that workers themselves should pay that extra 3 per cent, with the government chipping in another 3 per cent. In other countries, employers and workers share the cost of providing for the workers' retirement income.

And so they should. Why make Australian business globally uncompetitive by making it pay the workers' share?

The next steps for Swan are the savings and simplification reforms. Team Henry came up with an ingenious plan to improve the tax treatment of bank savings (highly taxed), capital gains (lightly taxed), negative gearing and margin trading (both highly subsidised) by a 40 per discount on income and losses alike, across the board.

This would reduce the tax paid by savers, and reduce the tax rorts for those using debt to reduce their tax. But Team Henry's clever plan was blocked by Team Rudd.

Reforms work by using handouts to sweeten the tough reforms. Swan appears to be gearing up to give us the handouts without the medicine.

A once-in-a-generation opportunity for tax reform looks like being buried in the sands.