Thursday, July 15, 2010

Mining tax revenue is a guessing game - REALITY CHECK

"WHERE is the money coming from?" the Coalition wants to know. How can the government reduce the revenue base for its mining tax so drastically, yet reduce the revenue forecasts so little?

It's a good question. After all, the original tax applied to nearly all minerals, the new tax to just iron ore and coal. The old tax was to take 40 per cent of all profits above a return of 5 per cent or so.

The new tax will take 22.5 per cent of all profits above a return of 12 per cent. And that's not all the changes the miners won.

Sure, there are offsetting factors. The government will no longer have to pick up 40 per cent of mines' losses or pay royalties for miners now outside the tax. But several private analysts estimate the tax take will be far lower than Treasury has forecast.

Who is right? Yesterday's budget update shed some light but left uncertainty. It told us:

Treasury now thinks the prices and volumes of mineral exports will be much higher than it predicted earlier. It now says the original version of the tax would have raised $18 billion in its first two years, not the $12 billion originally forecast.

So the revised mining tax reduced its take in the start-up years from $18 billion to $10.5 billion. The government misled us by not mentioning this when it announced the new version on July 2.

The impact in years one and two of the new tax is stunningly different. In year one, the original version of the tax would have seen many companies claim losses. Under the new version, revenue that year is now forecast to fall by just $1 billion. But in year two, the forecast revenue will be cut in half by the new version of the tax: from $13 billion to $6.5 billion. That's a huge change. And surely, isn't year two the best guide to what will happen in years three, four, five, six and so on?

Not necessarily, says Treasurer Wayne Swan. We don't know what future prices will be.

"Prices will go up, they'll come down, they'll bounce around," he said. "But they will be a higher level [than] the historical average was."

Well, maybe. But that's exactly the point.

If Treasury can revise its revenue forecasts from the tax by 50 per cent in just two months, how can anyone seriously know how much it will raise in two years, four years, let alone 10 years?

Like everyone else, all Treasury can do is guess. The May estimates are guesses. The new estimates are guesses. The forecasts by the Coalition and private analysts are also guesses.

Treasury's forecasts are for the terms of trade to peak in the second half of 2010, then fall slowly. But if they fall fast? Or if companies find ways to avoid the tax? We could easily end up with too little revenue to pay for the tax cuts and new spending it is meant to finance. That's the risk.




$b $b $b

Rudd version

Budget 3, 9 12

Now 5 13 18

New version

Now 4 6.5 10.5

Revenue loss -1 -6.5 -7.5