Treasury Secretary Ken Henry has confirmed that the changes to the government’s resource rent tax regime only reduced the revenue by $1.5 billion because commodity price forecasts were revised between the two taxes.

He didn’t say this, because he wasn’t asked, but it must be likely that the revised commodity price forecasts will have a much bigger impact on the budget than just helping get the new mining tax across the line.

It’s possible, indeed, that Prime Minister Julia Gillard now has some fluffy white rabbits to pull from her hat during the election campaign.

Appearing before the Senate Committee on Fuel and Energy yesterday, Henry was asked whether he had revised commodity prices for the purposes of the deal on the mineral resources rent tax last week, and he answered: “Yes.”

Senator Ian Macdonald: “How could you be so wrong a couple of months back?” Henry: “That is a good question.”

He went on to explain that it is quite normal for commodity prices to go up and down like this. “Have a look at the volatility of the prices of mining shares,” he said.

The first set of commodity price forecasts used for the revenue estimates for the resource super profits tax and the budget in May were the normal five-year forecasts produced by the Australian Bureau of Agriculture and Resource Economics (ABARE) for the federal budget every year.

The second of forecasts applied to the MRRT last week were Treasury’s. Ken Henry was asked whether he had relied on ABARE for the revised forecasts, and he answered: “We certainly take their views into account. I would not say rely on, but we certainly take their views into account.”

So … mystery solved. Except there are three things worth noting about this episode before we all move onto refugee policy:

  1. The mining companies have not revised their commodity price forecasts or else they would have had to tell the market;
  2. The new Treasury forecasts are based on this year’s contract prices, yet the new tax doesn’t start until 2012;
  3. The higher commodity price forecasts must also affect Treasury’s estimates of company tax, creating an unannounced ‘war chest’ for the Prime Minister in the forthcoming election.

There must now be a huge gap between Treasury forecasts of iron ore and coal prices and those of BHP Billiton, Rio Tinto and Xstrata. Does this matter? Probably not — they’ll all be wrong anyway. But it was very convenient for all sides last week.

It means the companies have nothing to report to the ASX, because they have not changed their revenue forecasts and the new tax, which purports to raise $10.5 billion in two years, actually has a minimal effect on what they think their profits will be.

Meanwhile the government has changed its revenue forecasts, so it has a totally different view of the impact of the tax to that of the companies. Everyone’s a winner.

Basing a forecast of tax revenue for the four-year forward estimates on this year’s commodity prices, rather than ABARE’s five-year forecasts, looks risky. But a year, as they say, is a long time in politics.

How the new commodity price forecasts since the May budget will affect the rest of the revenues in the forward estimates will no doubt be unveiled over the coming weeks.

Peter Fray

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