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.