Kevin Rudd isn’t winning any popularity contests of late and his Resources Super Profits Tax (RSPT) might not be helping the cause. According to the RSPT announcement document, the RSPT will force mining companies to pay 40% of their profits to “ensure the community receives a more consistent share in the returns of Australia’s non-renewable resources”. The tax has attracted criticism from the opposition, with Tony Abbott promising to rescind the tax should the coalition return to government later this year.
Since the government announced the RSPT, several large mining companies have ramped up the rhetoric about putting their Australian projects on hold. Rio Tinto’s proposed $11 billion venture into Western Australia’s Pilbara region has apparently been shelved with Fortescue also putting two major expansion projects on hold while details of the tax are fleshed out.
Debate about the tax continues to play out in the media,while voters are left scratching their heads and presumably to the surprise of the government, taxing the big old rich mining companies hasn’t given them any traction in the polls.
To cut through the confused commentary and politics of the RSPT, Crikey boiled it all down to a simple question for four of Australia’s leading economists:
“In your opinion, what impact will the new Resources Super Profits Tax have on the Australian economy?”
Stephen Walters, chief economist, JP Morgan: The debate over the RSPT already is having an impact on the Australian economy and financial markets, including the value of the Australian dollar. The extent of the “damage” is hard to quantify, with the truth somewhere between the two extreme positions currently being debated — the government’s assertion that the new tax will boost investment, and the mining industry’s position that the tax will destroy Australia’s golden goose.
Some mining investment already has been affected, which may cost jobs, partly because the real world of investment decision-making does not always correspond with what happens in theory. Indeed, despite what the economics tells us, in the real world of risky mining investment and a finite supply of capital, not all positive net present value (NPV) projects get approved and, more importantly, funded.
As far as international investors are concerned, the government’s announcement of the new tax has added to the weakness in the Aussie dollar, albeit at the margin, because it changed the risk parameters associated with investing in Australia. Many global investors trade the market first, and ask questions later. The lingering uncertainty over the structure of the tax, and the sometimes shrill tone of those making the opposing arguments, is only making things worse.
Shane Oliver, chief economist, AMP Capital Investors: Taking the Resources tax together with the other announcements around the Henry review and the Budget — notably the cut to the company tax rate and measures to further boost savings — I think the whole package should be positive for Australia over the longer term.
However, I am not in a position to assess the competing claims of the mining sector and the Government regarding the impact of the tax but in the interest of ensuring that we don’t damage the prospects for the Australian resources sector over the long term, and foreign investors’ perceptions of Australia as a reliable low risk and competitive global provider of commodities, I think there is a case for both sides to compromise on the tax. This is particularly the case given the continuing uncertainty regarding the global economic outlook and the role the resources sector has played and can play going forward, in providing a bit of a buffer for the Australian economy.
Steve Keen, Associate Professor of Economics and Finance, University of Western Sydney: Firstly, the definition of super profits in the announcement document is an example of how utterly naive conventional “neoclassical” economic theory is about real industry, and how much damage neoclassical economists can do when they are allowed to fiddle with the real world. They imagine that marginal costs of production exceed average costs: that the last tonne of ore extracted costs more to mine than the previous tonnes.
Yet almost 200 empirical studies have shown that this isn’t true: for over 90% of industries, average costs exceed marginal costs. Neoclassical economists ignore this empirical fact because it would stuff up their textbook theories — in fact, most of them don’t know this empirical fact, even though the data is readily available Marginal cost pricing would send most companies bankrupt.
Though I support the concept of a tax to capture some of the earnings from mining for the Australian public, this is a naive, neoclassical notion that can clearly do more harm than good.
Secondly, I agree with Malcolm Fraser’s comments on last night’s Q & A that the real debate should be about securing more of the value added from our mineral resources — a debate that did occur some decades ago but has now died out.
Thirty years ago, the then Gina Hancock ran an ad in The National Times for her father’s 65th birthday which had the lines: “There’s nothing wrong with Australia. There’s plenty of wealth in this country. All it takes is people with the guts and imagination to dig it up and sell it.” Sadly, that “wealth is a hole in the ground” attitude won out over developing Australian industry, and the best we can now do is debate how much we should tax the profits from mining.
Dr Ron Woods of www.roneconomics.com.au, independent funds manager: Whatever the merits or demerits of RSPT the timing of it is wrong. Whether real or imagined, the announcement has drawn undue negative attention onto Australia at a time when markets are especially skittish about any change in the sovereign risk of various countries. Thus this is likely to cause some negative assessments of the economy’s prospects and as these tend to become self-fulfilling it is likely to be a drag on the economy.