The government have made some solid major decisions during their first term. In my opinion, the size and delivery vehicles for the stimulus were appropriate. I think the Super Profits Tax (SPT) is sound, though you can argue over the details and which minerals it should apply to. Unfortunately, the government are not only incompetent administrators but positively autistic communicators. The SPT was well received in the days immediately after the budget. What happened? The SPT should sell itself. Especially because it feeds well into what should be the government’s two strand narrative.
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The first strand should be that they saved us from the GFC. Never mind whether you agree with this or not. It is a strong positive for them and they will win a landslide if the election is fought on this issue. The SPT is the flip side of the stimulus and an excuse to keep the stimulus front and centre of political debate.
The government put us into a big fiscal hole with the stimulus package. They have taken some criticism for the implementation (i.e. pink bats and school canteens) but the voters are mostly glad of the fact of the stimulus, while having misgivings about the debt going forward. The government have always claimed the country should get back into surplus over the business cycle. The money has to come from somewhere. Where else are we going to get the huge sums required?
Yet Wayne Swan denies that this is the main reason for the SPT. He wants to claim credit for getting us back into surplus by 2012-13 but is coy about how he is doing it. He should openly acknowledge his strategy. Yes, we need the money to balance the budget in 3 years.
This not only moves the focus back to on the consequent early surplus, but it feeds beautifully into what should be the second strand of the government’s narrative, namely investment in infrastructure and long term management of inter-generational wealth. Back when they were able to communicate, the ALP ran very hard with the idea that Howard had squandered the resources boom, pointing to slow trains and under-resourced schools. Regardless of whether you accept this view, it gained a great deal of traction. They should be positioning the revenue gained from the SPT as the avoidance of losing revenue the way we did in the last boom. People hate to lose revenue. If they position it this way, every time the punter hears the SPT mentioned, they think of all the money that would be lost if we did not have it.
But Rudd lives in Canberra and doesn’t know how ordinary people think. How else to explain calling it a Super Profits Tax? This is the greatest own goal of all time – a minor variation on the opposition’s “Great Big New Tax” mantra. They could have called it the 10% Excess Profits Premium, which carries the message that (a) it is only on high profits, (b) it is only a marginal change from 30% to 40% and (c) the country receives a premium on their resources. Premium is such a nice positive word compared to tax. Does the government have anyone who knows how to sell a product?
Apparently not. Instead, their shifting message is drowned out by mining industry propaganda which does not bear the slightest critical scrutiny. Journalists apparently think that they must not point out nonsense in the interest of appearing balanced. The mining lobby’s campaign has the following elements.
The SPT tax is excessive. It is only a change from 30% to 40% on profits over 6%. I am sure that most punters think that mining companies are being taxed an extra 40% on all their profits, if not on all their revenues. Rudd should have called it a 10% premium, not a 40% tax. The fact that this is worth $9 billion per year tells you how much profit is being made.
The SPT will harm investment. Since it is only a marginal charge on excess profits, it could not cause any existing profitable projects to close. It could certainly affect the economics of future ventures, since the rewards on the denominator of the risk/reward ratio will be smaller. So we might see less projects in future. This is not such a problem though. First, it will roll out slowly over time so there is a chance to react. If necessary, we can encourage new projects in the future by allowing more of the exploration costs to be deductible. Second, the resources are still in the ground so nothing (or little) is actually lost.
The marginal rate of 40% is internationally uncompetitive. It is suggested that the 40% rate being higher than say 25% in Chile is somehow relevant. This is nonsense. A decision to invest in country A or B will depend on the relative profit margin, not the tax rate itself. If Australia had diamond fields where you could just walk around and pick them up then we would be well advised to tax profits at 99%. I reckon mining companies would still fall over themselves to pick the diamonds up. No journalist has called the marginal tax rate argument for the nonsense it is.
The SPT tax is retrospective. It applies to future profits only. The mining companies complain that they made the decision to pursue these projects under a different tax regime. That’s true but in that case every time a landlord puts up rent on a commerical property it is retrospective. As the unfortunate holder of Tabcorp shares I know first hand that the value can decrease when government removes a monopoly right. Retrospective? This is just abuse of language.
The SPT increases sovereign risk. If they mean sovereign risk of the country then Kyran Curry from S&P disagrees. He says the mining tax would have no effect on our credit rating, which is an indicator of sovereign risk. In fact, he says the tax raised over the first two years could strengthen the rating.
The SPT will harm the whole economy. It is only a change from 30% to 40% on profits over 6% for one industry sector that is currently thriving. Moreover, most of the big mining company dividends go to foreign based shareholders. If you had to find $9 billion per year to take out of the economy to get us into surplus, you would be hard-pressed to find a less damaging way to do it.
None of this means that I support every aspect of the SPT. Many economists prefer a purer Resources Rent Tax. Nor do I think that the SPT would necessarily be an easy sell even if Rudd was at the top of his game. Nick Gruen thinks that the political landscape has fundamentally changed from when the RRT on petrol was introduced, and he may be right.
So what has been the effect of the SPT on the fortunes of the big miners and the country? I downloaded the share prices of RIO, BHP and the ASX for this year and looked at the month prior to the budget announcement and the month after. I calculated the movements of $1 equally invested in RIO and BHP on January 1 and subtracted off value of the same $1 invested in the ASX. The graph is below. The zero does not mean anything in particular. It is changes in the graph that tell you how mining is faring compared to the general market. I also downloaded the DJI for the same period so I could compare Australian and US shares.
The budget was May 11, about the middle of the graph. I guess you can tell two stories here. The mines drop compared to the ASX on May 11 and 12 and the ASX drops compared the DJI over the next week. Or you can look at the previous month which suggests that the market already knew the SPT was coming. If the drop from April 12 to May 12 is all due to the SPT then it is around a 10% loss for the mines. If you only count post announcment it is about 4%. Either way, mining share prices have been moving up compared to the market over the last month – as has the ASX compared to the DJI – recovering perhaps half the lost ground. This might represent the market perception of the likelihood of the SPT actually ever being implemented.
I wish I had the time to do a similar graph for “small miners” but I do not know enough of their names and there are too many of them. If the SPT designers are to be believed, small mining shares should show the opposite pattern to that of the large miners.