Someone needs to tell Wayne Swan that the commodities boom ended a couple of years ago. They might also point out to him that the Minerals Resource Rent Tax whose passing he laments, was almost certainly costing more to comply with, administer and collect than it raised.
The former Treasurer was tweeting away today in response to the repeal of the tax in the Senate.
“As mining production expands, Australia now without a profit-based tax to collect a decent return for our resources,” he wrote.
The MRRT was a tax on the profit generated by iron ore and coal, replacing the even less-well-conceived Resources Super Profits Tax that Swan tried to impose without notice on the resources sector and which played a major role in the abrupt end to Kevin Rudd’s first term as prime minister.
When Swan proudly announced the new tax in 2010 (after negotiations with the big miners) he said it would raise $22.5 billion over four years. It was supposed to raise $3 billion in 2012-13. It raised $200 million. It was supposed to raise $4 billion in 2013-14. It raised $100 million.
But Swan, in what was a common theme of his period as Treasurer, had locked in spending against the revenue he thought the tax would raise anyway. That’s a significant part of the explanation for why the budget is in structural deficit and why Joe Hockey is so unpopular as he struggles to wind back the spending that was supposed to be funded by the tax.
The problem with a profit-based tax like the MRRT in the current environment is that there are no super-profits to be taxed. There’s barely a profitable coal mine in the country and most iron ore miners other than Rio Tinto and BHP Billiton will, with iron ore prices now down to a smidgeon over $US87 a tonne, be struggling for their survival.
Rio and BHP have so far been able to maintain their iron ore profits by driving volume increases and cost cuts, but even with continued volume increases they may struggle to offset the impact of the recent fall in the price. There is an expectation among analysts that their rising production will, when combined with weak demand for China, push the price even lower as the surplus of supply over demand grows.
It isn’t necessarily the case, therefore, than an expansion in production would lead to any meaningful amounts of MRRT tax being paid, particularly as the investment in expanding production capacity can be written off immediately.
Quite apart from the reality that there were no “decent” returns available to the federal budget from the MRRT, the reality is that the resources concerned aren’t “our resources” but belong to the states where the mines are located.
The iron ore and coal miners pay largely volume-based royalties to state governments, which is why their effective tax rates are well above -- about ten percentage points above -- the normal company tax rate. Rio Tinto, for instance, paid $US1.9 billion in royalties to state governments last year, along with $US3.2 billion in Australian company tax.
The states will continue to benefit from any increase in coal and iron ore production volumes while the federal government will continue to collect company tax from the profits iron ore and coal miners generate, assuming they do generate profits.
So, the tax that Swan was so besotted with raised effectively no net revenue and would have been unlikely to have raised anything meaningful unless or until there was another “once-in-a-generation” commodity price boom. That might take a while.
Unfortunately, while the tax might have been axed, some of the spending decisions that were made in anticipation of a flood of revenue that never materialised -- like the extraordinarily wasteful school kids bonus -- won’t be repealed because of the make-up of the Senate.
Still, the deal with the cross-bench senators at least produces $10 billion of the $16.5 billion of savings Hockey originally hoped to achieve by axing Swan’s reckless spending measures along with the tax.