Monday, July 12, 2010

Swan's sleight of hand hides mining concession

Tony Abbott is right. Julia Gillard and Wayne Swan have grossly misled the public on the cost of their abject surrender to the three big mining companies over the former resources super profits tax.

They claimed that almost halving the rate of the tax - from 40 per cent to an effective 22.5 per cent - and making various other concessions demanded by the companies would reduce tax collections by just $1.5 billion over its first two years, a mere 12.5 per cent of the originally budgeted $12 billion.

How was that unbelievably small cost achieved? Partly by shifting the goal posts. As we now know, the revenue to be raised by the new version of the tax was estimated using higher prices for coal and iron ore than were used in estimating the revenue to be raised by the original version. The new estimates also used different assumed production volumes.

To what extent do these "parameter" revisions cause the revenue cost of the policy changes to be understated? Gillard and Swan are still refusing to say. Apparently, this is none of the electorate's damn business. So we're forced to rely on estimates by people not in full command of the facts.

These suggest the government's figure of $1.5 billion over the first two years understates the value of the concessions to the big miners by

$1.6 billion (according to sharemarket analysts at Goldman Sachs JBWere), or $3 billion (according to mining tax consultants quoted by David Uren of The Australian, who deserves special mention for pursuing this issue).

Let's be clear: there's nothing wrong with the government using more up-to-date parameters when it redoes its budget figuring. No, the crime is to do so without acknowledgement, let alone without indicating the value of the parameter changes. Swan not only failed to acknowledge the change, he avoided answering a direct question on whether he had changed any of the assumptions that underpinned the revenue estimates. (These figures have not been made public - you won't find them on Swan's website - but merely "circulated" to gallery journalists, presumably because Swan had something to hide.)

Coming from a treasurer, this isn't tricky behaviour, it's dishonesty. If you can't trust the Treasurer to be honest about the cost of measures, who can you trust? I can't think of a previous treasurer who betrayed our trust so badly.

But the other part of the sleight of hand is to change the tax in ways that have implications over many years, then tell us only about the first two. Telling us more would involve making assumptions about commodity prices and exchange rates, but that's just as true of the four years of estimates produced for every budget and budget review.

It's a weak excuse that could be overcome if the government wanted to do so. So again we're forced to rely on figuring by outsiders lacking the Treasury's knowledge. The Goldman Sachs analysts estimate that, on a like-with-like basis and using quite pessimistic assumptions about commodity prices, the cost to revenue of the changes imposed by the big three will total about $35 billion by 2019-20.

With the original tax package (that is, including all the tax concessions on which the resources tax revenue was to be spent) we were given no idea of whether it was revenue neutral beyond the first two years. It may not have been because the loss of revenue arising from lifting the superannuation guarantee to 12 per cent by 2019-20 will be huge.

But whatever the position originally, it's a safe bet it will be worse now the chief payers of the minerals resources rent tax have been allowed to redesign it.

Even so, there are a few points to make. Few people have noted that, according to Swan's figures, revenue will be $1 billion higher in the first year, but $2.5 billion lower in the second. These differences partly reflect the secret parameter changes, but they also seem to reflect the choice companies were given between writing off their assets at book value at an accelerated rate over five years (36 per cent in the first year, 24 per cent in the second), or writing them off at market value over 25 years (4 per cent a year).

Since we can be sure the companies will pick the method that favours them, this choice will end up reducing the amount the tax collects. In the early years, however, those companies opting for market value will pay more tax rather than less.

But it doesn't follow that all the tax saved by the big companies equals the amount lost by the taxman. Why not? Because Gillard and Swan have allowed the big three to rejig the tax in ways that suit them at the cost of the smaller miners, particularly those in the early years of their projects and those mining ventures yet to be born.

The original tax's now-abandoned guarantee to pick up 40 per cent of losses was of little value to the big boys, but (despite their claims to the contrary) of great value to the new small boys (as was also the now-abandoned plan to give a refundable rebate rather than a simple deduction for exploration costs).

Whereas under the original tax 2500 firms would have been affected, now only about 320 will be. But this means about 2200 mining companies will now not be relieved of paying state royalties. And those remaining in the tax net will get only a deduction against profits (and a carry-forward in the event of losses), not an automatic refund.

This greatly reduces the economic efficiency gain from the new tax because so many miners will remain subject to royalties based on volume or price, not profits. Well done.