SB: To illustrate your point, I had a conversation recently with a very senior mining industry executive who said that it’s easier for him to go to his board and say "can we spend $2 billion or $3 billion dollars in Africa?" than it is to say "can we spend $2 billion or $ 3 billion in Australia?" I assume that you’ve had those sorts of conversations.
MH: I have. And I’ve also had many discussions with the financial markets offshore and only the other day, if I get the quote right, it was, you know, "what you guys doing down there? I’m seriously thinking about redirecting my investment." Now, you know, this is a major player.
AK: From Texas.
MH: Yeah. How was my accent – alright?
MH: Thought I’d lighten it up a bit for you. But if you’re a start-up, small or mid cap, you’re trying to get project financing and it's very tough, very tough. People are not making the distinction between debt and equity. You can see the papers are all putting pressure back onto companies – saying, you know, is this really what you want to be doing?
AK: Do you get the feeling that this budget coming up in May could be a pivotal moment?
MH: I do.
AK: I mean, given the fact that Wayne Swan has promised a surplus, he’s got a long way to go from where he is now in deficit terms for the surplus. This could be a big budget.
MH: Yeah. I think it is. I think it’s quite pivotal and I think it’s pivotal because it actually goes to a manifestation of what is a fundamental problem we have in the Australian economy. And that is that most of the circumstances we’re facing are structural; they’re not a normal economical business cycle. We’re not at that sort of a…
RG: What do you mean they are structural?
MH: Well, what I mean is that the shift in the policy focus in Australia is more on redistribution than it is on building the pie. It’s not about actual national capacity building. It’s about how you carve it up. So we need to shift gears about focus on spreading the benefits of the boom: higher taxes, increased spending, increased regulation to actually tackle the issues that are fundamentally and structurally flawed in terms of where we’re going in Australia.
The budget is in deficit. We’ve got a reinstitutionalisation of third party intervention into the workplace. Productivity is a structural problem. It shows no sign of waning. So too the infrastructure constraints, social and physical across Australia, they show no signs of cyclical abatement. The sort of emerging protection of some sectors – the idea that you know we’ve got to look after industries that are facing structural adjustment because of the changes in the global economy or that we’ve got to prop them up and we’ve got to assist them – and it’s not even transitional assistance, it’s actually just ongoing. This is what I mean about structural.
So, the budget is in structural deficit. I mean, with the $260 odd billion dollars that we’ve slipped into the economy over the sort of decade of the boom, there should be one per cent of GDP in surplus, not in massive debt, and we continue to get a belting from manufacturing and others because of the dollar. Well, have a look at what the dollar was doing in the first few years of the boom when up to 2007/2008 and the global financial crisis when the budget was in surplus and we didn’t have a massive foreign debt. It was running at, what, eighty cents or something? The thing that’s driving the dollar is not just that it’s a commodities denominated currency, but it’s that $250 odd billion dollars of sovereign debt, where 75 per cent is held in foreign securities, has a fair bit to do with pressure on the dollar. The fact that the economy has speed limits to growth. I mean it’s a point that the Reserve Bank and others have made. If you lift the speed limits to growth in the economy as a whole, then you reduce the inflationary pressures on the basic factors of productivity, labour and capital.
AK: So, do you think the budget should be got back into surplus in this budget?
MH: I’m more inclined to there being a structural framework. You know, a systemic approach to addressing the structural problems rather than a small sort of token gesture of it being in surplus this time around. You know – and you’ve been talking to companies – you know that the markets and the companies are not going to be too particularly seduced by a small surplus on budget night. They’re going to be looking at what is the long-term and medium-term fiscal strategy of getting the budget back into fiscal repair. And they’re not going to be particularly enamoured with any prospect that we’re going to tax our most productive wealth generating industries to the point where they are seriously disinclined to invest.
RG: If on budget night we see a series of major taxes in the mining area along the lines you talked about or some of them, do you think we’ll see a large number of projects pulled out of Australia?
MH: Yes, I do. People said to us through the super profits tax oh you’re just gaming it, you know, 'oh, I think with hindsight and with the benefit of the Freedom of Information documents from Treasury, throughout that entire campaign'. And nobody has yet come up with something that we said that wasn’t accurate in terms of the figures. We were told we weren’t paying our way. We were told that our effective tax rate was very low. I think they used an undergraduate study from a university in the United States rather than their own ATO data.
The facts show quite clearly that our effective tax rate through that period was somewhere in the order of forty-two per cent. It was north of forty per cent. When you put in royalties as well, the massive, massive amount of tax we’re paying – and it showed quite clearly the rate of growth that as the industry profited – so too did the coffers of governments in terms of royalties and company taxes paid. So, the deliberate misrepresentation of the industry’s contribution held up, so too did our arguments about the potential risk to projects on the destruction of their present value and through that debate. As you will recall, a number of companies came out and said these are the projects that are at risk. Now, it’s very difficult for companies to come out and put on the table – and you guys know better than I do about the disclosure laws – what they have and can’t and can say, but people in my position can say quite honestly, without obviously naming projects, that I am well aware of the exposure and the vulnerability for many of our projects particularly those that are operating in the third quartile of the cost curve.
SB: You’ve started a new ad campaign. I assume it’s partly in response to some of the issues you’ve already referred to, but there’s also however this kind of growing, community wide anti-mining sentiment and we see I suppose most graphically in the CSG discussions and the Greens opposing the CSG industry. Are you concerned about that? I mean, is that sort of anti-mining sentiment a threat to the industry?
MH: Yeah. There are two sources to it. The first is in demonising the industry as being the root cause of a lot of the structural adjustment pressures on other parts of the economy. If we were back in the ‘70s, the last time we had a commodities boom, where just about every aspect of economic policy was under the control of government, you know, we had a fixed exchange rate. We had a controlled labour market. We had tariffs and subsidies protecting industries. Agricultural marketing arrangements were all under the collective. Governments owned energy and water utilities, ports, railways, airlines. We all had defined super benefits.
That was a rigid economy protected, not going anywhere and that boom ended in tears, double digit inflation, unemployment and interest rates. Fast forward thirty years, to two-and-a-half decades of remarkable reforms that have opened up the economy. It’s meant that the benefits of this boom have been able to flow through the community far more than they did previously. It’s not just our view. It’s the view of the Reserve Bank and a whole stack of other commentators. But if you’re sitting having your latte or your chardonnay or whatever it is downtown in Sydney, it’s a bit hard to see it. Opportunity costs are not something you can touch and feel and kick and sometimes people actually don’t realise what they’ve got until it’s gone. And so the benefits of the mining boom flowing through the economy on a whole are quite palpable.
And some two-thirds of the increase in the national revenue from the hundred-and-fifty-year high terms of trade is running through the economy as a whole. Of the other third, about 98 per cent of that has been reinvested back into the economy. But then you have a treasurer who says or deliberately misconstructs the argument about how much tax we’re paying as a share of profits and just gets it wrong. It’s a silly argument anyway that we’re not paying as much tax as we could because we’ve got deductions on investments. Well, I mean investments today are the taxes of tomorrow, so that’s a pretty dumb argument to be running, but even the fact is he’s just got it wrong. Our share of all company taxes is running at about 25 per cent. And our share of profits, or taxable income, is about 20 per cent.
So, we’re in fact paying more tax and when you put it as a percentage of GDP, we’re only about 8 per cent of GDP and yet our tax rates are about 23, 24 per cent of all taxable income for companies and that’s without including royalties. So the point I’m trying to make is that of course the community sentiment is going to be pitched that way when people keep continually harping on. Even the Secretary of Treasury said that the benefits of the mining boom were solely being distributed to foreign shareholders. I mean, I don’t actually understand how anybody could make that kind of a statement.
The second part of your question is the tensions on land use and there’s no question that ten years ago – and even longer than that, but certainly as recently as ten years ago, the mining industry was perceived as the neighbour from hell. It got its act together. It understood what environmental and social stewardship is actually all about. It understood what a commitment to sustainable development is all about and it’s working through that process.
There is a distinction between the industries: the new entrants, coal seam gas and those that have been in the business a long time. The coal seam gas guys, we don’t represent them, but they’ll work their own way through that equation. But there’s no question that the tensions over land use have transcended the conservation estate and they’re now with the farmers. And being an old farmer, I understand those tensions and I understand the sheer power and importance of engagement, of listening and learning, not pontification. Facts are not your advance case, engagement is.
AK: Thanks very much, Mitch.
MH: You’re welcome.
Follow @AlanKohler on Twitter