After weeks of questioning, Treasurer Wayne Swan admitted what appeared obvious to many — that the mineral resources rent tax will raise a lot less revenue for the government than the resources super profits tax would have. Forecasts announced on Wednesday mean that the claim that the new tax would amount to a mere $1.5 billion revenue reduction is either grossly misleading or the Treasury (which determined the revenue projections for the original tax) are utterly incompetent.
When the MRRT was announced, Julia Gillard conceded that the increased commodity price forecasts allowed the government to claim that the difference between the two taxes was only $1.5 billion per year — however, the extent of the increase and the logic those claims were certainly not properly explained. For good reason.
On Wednesday, in the midst of a wider economic forecast that predicted a far larger surplus for 2012-13, Swan revealed that had the RSPT been introduced, it would have raised $24 billion in two years — compared with $10.5 billion for the MRRT — a not so minor difference of $13.5 billion in a couple of months. Previously, the Federal Government had claimed that the RSPT would raise $12 billion in its first two years. (Swan conceded that “it is true that the Treasury underestimated where that was and I accept responsibility for that as the Treasurer.”)
The gravity of the error is compounded when the current iron ore prices are considered. Stephen Wyatt in the Financial Review today stated that “iron ore prices are in free fall and declines are expected as Chinese steel mills — the steel giants of the world — begin to deepened production cuts because of slowing economic growth and inventory de-stocking.” Wyatt noted that in the past three months, iron ore prices have slumped by 40%. (Nickel, which is not subject to the MRRT has fallen by almost 30% in three months, while copper is down 17% since April).
Since the announcement of the resources super profits tax, the price of iron ore (which is one of two commodities subject to the MRRT) has almost halved, but the government claimed that the amount of revenue to be raised be double — due to none other than higher forecast commodity prices. The forecast changes also appeared to surprise Macquarie Bank economist, Richard Gibbs, who noted:
Such a puzzle could be resolved if Treasury significantly upgraded their forecasts for those commodities included in the MRRT [coal and iron ore] but offset for lower prices for other commodities, which would be a very fortuitous combination of events.
In a sense, the fact that the MRRT is raising far less revenue that claimed is not necessarily the major issue (although it is somewhat concerning that the body responsible for developing economic policy can be so inept at determining forecasts upon which those policies are based). Where Gillard succeeded most is in removing the requirement for the government (and effectively taxpayers) to refund 40% of mining projects from unsuccessful projects. It was the refund element that was the biggest problem with the RSPT — serving to promote marginal mines and exposing Australian taxpayers to the risk of repaying billions to unsuccessful risk-taking mining companies in the event that commodities prices ease — something that is looking increasingly likely.
The author has a short economic interest in the S&P500 index