Why the good times don't feel so great

SOMEONE'S getting filthy rich out of this resurgent mining boom, but it ain't the federal government.

By InvestSMART · 8 Mar 2012

By InvestSMART ·
8 Mar 2012

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SOMEONE'S getting filthy rich out of this resurgent mining boom, but it ain't the federal government.

The secretary of the Treasury, Martin Parkinson, has used his first anniversary in the job to warn that Australia faces a decade of ''razor-thin'' surpluses despite the biggest boom in the nation's terms of trade since the gold rush days.

It's an astonishing - and, on the surface, somewhat confusing - result.

Australians, after all, are accustomed to the federal government bathing in an embarrassment of revenue riches delivered by the mining boom.

During the mid-noughties, Treasury was habitually embarrassed when its revenue forecasts - which assumed an imminent plateau in commodity prices - proved too pessimistic. This enabled the then treasurer, Peter Costello, to perform his annual crowd-pleasing trick of pulling a bigger-than-expected surplus out of his budget hat.

The revenues from the first wave of the mining boom helped pay off government debt, create a Future Fund to cover unfunded public service superannuation liabilities and keep the budget in surplus at 1 per cent of gross domestic product.

The rest was returned to taxpayers in successive years of income tax cuts which took the top individual tax rate from 47 per cent to 45 per cent and pushed out the point at which it applied from $60,001 in 2002-03 to $150,001 in 2007-08 and $180,001 today. And come election time, there was always plenty of cash in the kitty for one-off bonus payments for seniors and families.

But this time is different. The global financial crisis has fundamentally reshaped the Australian economy. Tax revenue as a percentage of GDP has fallen as a result.

Asset prices have gone backwards on shares and stagnated on housing, reducing tax collected through the capital gains tax. Whereas one in 12 houses changed hands each year during the early noughties, today it is just one in 25, as the Reserve Bank deputy governor Phillip Lowe pointed out in a separate speech yesterday. And even when houses sell, the capital gains realised are not growing anything like they once were.

Households - which had already reached the limits of their debt-fuelled spending binge in response to structurally lower interest rates - have also reacted to the global financial turmoil by reducing spending. Revenue from the goods and services tax remains depressed.

A higher dollar this time around - a symptom of Australia's relative economic success - is also depressing company profits in the non-mining sectors of the economy, particularly in tourism, education services and some parts of manufacturing. Finally, despite mining companies producing around a fifth of total profits, they represent only a tenth of total company tax paid. A huge ramp-up in investment in infrastructure means they can offset their taxable profits by claiming deductions for the depreciating value of their assets.

Hitting the government's surplus target for 2012-13 will be no easy task.

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Frequently Asked Questions about this Article…

Why doesn’t Australia’s mining boom automatically create big government surpluses?

Despite a strong mining boom and high terms of trade, the government isn’t automatically swimming in surpluses because the global financial crisis and structural changes have reduced tax revenue as a share of GDP. Lower asset prices (shares and housing), weaker capital gains tax receipts, depressed GST from lower household spending, a higher dollar hurting non‑mining corporate profits, and large mining investment deductions mean revenue gains from mining don’t flow through to big budget surpluses.

How did the global financial crisis change tax revenue and the budget outlook?

The article explains the GFC reshaped the economy so tax revenue as a percentage of GDP has fallen: asset prices fell or stagnated (reducing capital gains tax), households cut spending (depressing GST), and overall revenue growth is weaker — all making it harder for the budget to return to the large surpluses seen in the mid‑2000s.

What impact does slower housing turnover and lower capital gains have on government revenue?

Slower housing turnover and smaller capital gains reduce capital gains tax receipts. As noted in the article, housing sales dropped from about one in 12 houses changing hands to roughly one in 25, and even when houses sell the gains realised aren’t growing like they once were, which lowers tax revenue.

If mining companies are highly profitable, why don’t they pay much more company tax?

The article points out that while mining companies produce about a fifth of total profits, they account for only about a tenth of company tax paid. A major reason is the ramp‑up in mining investment: firms can claim deductions for the depreciating value of assets, which offsets taxable profits and reduces their current tax bills.

How does a stronger Australian dollar affect non‑mining businesses and tax collections?

A higher Australian dollar — partly a sign of Australia’s relative economic success — depresses profits in export‑exposed non‑mining sectors like tourism, education services and parts of manufacturing. Lower profits in these sectors reduce company tax receipts and therefore weigh on overall government revenue.

What did earlier mining boom revenues pay for, and why can’t the government repeat that now?

During the mid‑2000s mining windfall paid down government debt, helped create the Future Fund to cover public service super liabilities, kept the budget in surplus and funded tax cuts and one‑off payments. The article says those outcomes are hard to replicate now because overall tax revenue is weaker, asset prices and household spending are lower, and structural changes post‑GFC limit fiscal room.

Is it realistic for the government to meet its 2012–13 surplus target?

The article concludes that hitting the government’s surplus target for 2012–13 will be no easy task, given the combination of lower tax receipts, subdued asset markets, weaker GST, a strong dollar hurting non‑mining profits, and tax offsets from heavy mining investment.

What should everyday investors watch for in relation to the mining boom and the federal budget?

Everyday investors should monitor commodity prices and mining investment levels, asset prices (shares and housing), housing turnover and capital gains trends, household spending and GST receipts, and the Australian dollar. These factors influence company profits, tax receipts and the budget outlook — all of which can affect markets and investment returns.