Let's be more hard-nosed towards foreign miners

Joe Hockey and Competition and Consumer Commission boss Rod Sims must surely deserve a medal for their selfless devotion to the interests of foreigners, after their shocked reaction to Twiggy Forrest's suggestion that the world's big producers stop the plunge in iron ore prices by limiting their output.

And here was me thinking economics was about rational self-interest.

Hockey sniffed that the idea smacked of forming a cartel. Which was good of him when you remember the way the plunging price of iron ore is robbing his budget of company tax revenue and causing his deficits to be bigger than those Labor left.

We can't afford to give much money to the foreign poor, but if foreign-owned mining companies want to keep forcing down ore prices by expanding production at a time when world demand is weak, that's fine by Joe.

Sims proclaims that cartels are illegal and is investigating whether Twiggy should be prosecuted. It surely can't have escaped his notice that very little of Australia's iron ore production is used locally, meaning no Australian consumers or businesses would suffer from such an arrangement.

But that, apparently, is not the point. Cartels are morally wrong, even if they advance Australia's national interest. If big foreign-owned producers such as Rio Tinto and BHP Billiton want to use their lower costs per unit to keep expanding production, forcing down the world price and attempting to wipe out higher-cost Australian-owned producers such as Forrest's Fortescue Metals, good luck to them.

Fine by us. That's the way the global resources game has always been played – wild swings from excess demand and inadequate supply causing booms, to weak demand and excess supply causing busts – and so that's the way it must continue to be played.

No effort can or should be made to moderate this crazy game. That there is a lot of fallout on bystanding industries, workers and consumers in the countries where big mining chooses to play this contact sport, is just an unfortunate fact of economic life which it is our government's sacred duty to make us grin and bear.

But while we're being so noble and self-sacrificing, it's worth remembering it wasn't always thus. Consider the many decades in which our governments sought to stabilise the world price of wool, which ended badly only after misguided economic rationalists handed control of the scheme to the woolgrowers themselves.

And don't forget the old Australian Wheat Board's "single desk". We weren't big enough to control world wheat prices, but we did make sure our growers weren't bidding against each other.

While the punters talk xenophobic nonsense about Chinese state-owned corporations taking over NSW's electricity poles and wires, Australia's economists have a deeply ingrained ethic that it's a form of racism ever to acknowledge that a company is foreign-owned.

Now we're in the final throes of the decade-long mining resources boom, it's a good time to reflect on how much we got out of it (not all that much, remembering it's all our minerals) and how well we handled it.

We played it by letting the foreign mining companies do pretty much whatever they wanted, which was to build as many new mines and gas facilities as possible in minimum time. This insane rush came at the expense of all our other industries, but no one questioned its wisdom.

It was left to the Reserve Bank to ensure the miners' greedy stampede didn't cause a wages breakout and inflation surge, which it did by repressing the rest of the economy. To "make room" for the money-crazed miners, it held interest rates higher than they otherwise would have been, which may have caused the exchange rate to be even higher than otherwise.

Was any effort made to assess whether attempting to build 180 resource projects in three years was in the national interest? Yes, but the economists left it to the lawyers. Each of those projects would have been accompanied by an environmental assessment assuring some court that the project would create thousands of jobs and do wonders for the economy.

Evaluating each project separately, the lawyers bought it. You needed to be a macro-economist to see that, added together, those claims made no sense. There wasn't that much skilled labour available and, with the economy near full employment, it just isn't possible to create many extra jobs. All you'd do is move jobs around, bidding up wages and creating shortages in the process.

But the macro-economists were away at the time, probably busy explaining to politicians why it was our economic duty to allow foreign mining companies to use our economy as a doormat.

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Mining boom our gift to rich foreigners

The mining tax - whose last-minute reprieve may well prove temporary - is the greatest weakness in the argument that we gained a lot from the resources boom. The blame for this failure should be spread widely, with economists taking a fair share.

Late last week a majority of senators passed the bill repealing the minerals resource rent tax, but not before knocking out its provisions cancelling various programs the tax was supposed to be paying for.

The government is refusing to accept the amended version of the bill, arguing that "by voting to keep many of the associated spending measures [naughty - most are actually tax expenditures], senators have effectively voted to keep the mining tax".

We'll see how long that lasts. But if you're thinking the tax raises so little it hardly matters whether it stays or goes, you're forgetting something. When Labor allowed BHP Billiton's Marius Kloppers and his mates from Rio Tinto and Xstrata (now Glencore) to redesign the tax, they predictably opted to take their depreciation deductions upfront. Once they're used up, however, receipts from the tax will be a lot healthier - provided it survives that long.

You can blame Kevin Rudd, Wayne Swan and Julia Gillard for their hopeless handling of the tax. But don't forget to copy in Tony Abbott who, faced with a choice between the interests of Australian taxpayers and the interests of three foreign mining giants, sided with the latter in the hope they'd fund his 2010 election campaign.

You can also blame Treasury for originally proposing an incomprehensible, textbook-pure version of the tax which couldn't survive, and so getting us lumbered with a fourth-best version. It also did a bad job of quietly test-marketing the tax with its banking contacts and of estimating the likely receipts.

But where were all the economists - including academics - explaining to the public why the tax wouldn't discourage mining activity or otherwise damage the economy, as it suited the big miners to claim?

Where were the economists explaining the special need for a resources rent tax in the case of the exploitation of mineral deposits, particularly when the miners were so largely foreign-owned?

As usual, they were keeping their mouths shut. Contribute their expertise to the public debate? Why? Better just to criticise from the sidelines.

Part of the problem is an ethic among economists that regards it as bad form to distinguish between local and foreign investors for fear of inciting "economic nationalism" - a form of xenophobia. If an investment generates jobs and income, why does it matter whether the firms involved are local or foreign?

It's no doubt thanks to this ethic that we do such a bad job of measuring foreign ownership (and so deny ourselves the ability to use hard facts to fight xenophobic impressions that foreigners now own everything). But the best guess is that mining is about 80 per cent foreign-owned.

Trouble is, mining is an obvious exception to this generally sensible aversion to economic nationalism, for two reasons: because our abundant natural endowment makes minerals and energy such a huge source of economic rent and because mining is so extraordinarily capital-intensive.

Added to that, as Dr Stephen Grenville (a former senior econocrat who does make a useful contribution to the public debate, via the Lowy Institute) has written, "mining royalties, a state government domain, fall victim to special relationships and inter-state competition to attract projects".

Put all that together and you see why having an effective resource rent tax is so essential to ensuring Australians get a fair reward for the exploitation of their birthright. High economic rents, few jobs created and the lion's share of profits going to foreigners mean unless especially high rates of profitability are adequately taxed we don't have a lot to show for the resources boom.

Saying that isn't anti-foreigner, it's simple self-interest, the driving force of market economies. Foreigners are welcome, provided we get a fair share of the benefits. Foreign investment isn't meant to be a form of aid to rich foreigners.

It's true our rate of national saving increased during the boom. But a lot of this was foreign-owned mining firms reinvesting their profits in local expansion rather than repatriating them, thereby increasing their share of our productive assets.

Now the construction phase is ending, more of the (undertaxed) profits will be sent back home. And the capital-intensive production and export phase will mean each $1 billion of growth in GDP now creates fewer jobs than it used to. Thank you Labor, thank you Coalition, thank you economists.

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We own as much of their farm as they own of ours

Did you know that, at the end of last year, the value of Australians' equity investments abroad exceeded the value of foreigners' equity investments in Australia by more than $23 billion?

It's the first time we've owned more of their businesses, shares and real estate ($891 billion worth) than they've owned of ours ($868 billion).

These days in economics there's an easy way to an exclusive: write about something no one else thinks is worth mentioning, the balance of payments. We'll start at the beginning and get to equity investment at the end.

Before our economists decided the current account deficit, the foreign debt and our overall foreign liability weren't worth worrying about, we established that, when measured as a percentage of national income (gross domestic product), the current account deficit moved through a cycle with a peak of about 6 per cent, a trough of about 3 per cent and a long-term average of about 4.5 per cent.

Those dimensions were a lot higher in the global era of floating exchange rates than they'd been in the era of fixed exchange rates (which ended by the early '80s). This worried a lot of people, until eventually economists decided the new currency regime meant there was less reason to worry.

This explains why economists haven't bothered to note that for four of the past five financial years, the figure for the current account deficit as a percentage of GDP has started with a 3. And, as we learnt earlier this month, the figure for the year to December was 2.9 per cent.

So it seems clear that recent years have seen a significant change in Australia's financial dealings with the rest of the world. And the consequence has been to lower the average level of the current account deficit.

The conventional way to account for this shift is to look for changes in exports, imports and the "net income deficit" - the amount by which our payments of interest and dividends to foreigners exceed their payments of interest and dividends to us.

The first part of the explanation is obvious: over the past decade, the world's been paying much higher prices for our exports of minerals and energy. This remains true even though those prices reached a peak in 2011 and have fallen since then.

On the other hand, the prices we've been paying for our imports have changed little over the period. So, taken in isolation, this improvement in our "terms of trade" is working to lower our trade deficit and, hence, the deficit on the current account.

Next, however, come changes in the quantity (volume) of our exports and imports. Here, over the full decade, the volume of imports has grown roughly twice as fast as growth in the volume of exports. Until the global financial crisis, we were living it up and buying lots of imported stuff. And maybe as much as half of all the money spent on expanding our mines and gas facilities went on imported equipment.

The more recent development, however, is that the completion of mines and gas facilities means enormous growth in the volume of our mineral exports - with a lot more to come. At the same time, as projects reach completion there's a big fall in imports of mining equipment. That's a double benefit to the trade balance and the current account deficit.

Turning to the net income deficit, it's been increased by the huge rise in mining companies' after-tax profits, about 80 per cent of which are owned by foreigners. Going the other way, world interest rates are now very low and likely to stay low.

Put all that together and it's not hard to see why current account deficits have been lower in the years since the financial crisis, nor hard to see they're likely to stay low and maybe go lower in the years ahead.

The current account deficit has to be funded either by net borrowing from foreigners or by net foreign "equity" investment in Australian businesses, shares or real estate. This means the current account deficit is the main contributor to growth in the levels of the national economy's net foreign debt, net foreign equity investment and their sum, our net foreign liabilities.

Historically, our high annual current account deficits worried people because they were leading to rapid growth in the levels of our net foreign debt and net total liabilities.

But looking back over the past decade, and measuring these two levels relative to the growing size of our economy (nominal GDP), there's no longer a clear upward trajectory. Indeed, it's possible to say our net foreign debt seems to have stabilised at about 50 per cent of GDP, with net total liabilities stabilising a little higher.

Over the decades, the level of net foreign equity investment in Australia has tended to fall as big Aussie firms become multinational by buying businesses abroad and Aussie super funds buy shares in foreign companies, thus helping to offset two centuries of mainly British, American, Japanese and now Chinese investment in Aussie businesses.

But the net total of such equity investment is surprisingly volatile from one quarter to the next, being affected not just by new equity investments in each direction, but also by "valuation effects" - the ups and downs of various sharemarkets around the world as well as the ups and downs in the Aussie dollar.

Between the end of September and the end of December, net foreign equity investment swung from a net liability of $27 billion to a net asset of $23 billion. This was mainly because of valuation effects rather than transactions, so I wouldn't get too excited.

What it proves is that, these days, the value our equity investments in the rest of the world isn't very different from the value of their equity investments in Oz.

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Latest on the debt no one mentions

It's funny that people who like to worry about the supposedly humongous size of our "debt and deficits" have focused on one debt when they could have picked another one four times bigger.

They carry on about the federal "net public debt", which is expected to have reached $162 billion - equivalent to 10.6 per cent of gross domestic product - by the end of this month. It's now expected to peak at $192 billion - 11.4 per cent of GDP - in June 2015, before it starts falling.

But that's chicken feed compared with our "net foreign debt", which reached $760 billion - 51 per cent of GDP - in December.

Whereas the net public debt is the net amount owed by the federal government to people who hold its bonds (whether they're Australians or foreigners), the net foreign debt is the net amount Australian governments, companies and households owe to foreigners.

One reason for the lack of trumpeted concern about the foreign debt is you can't score any party-political points with it. In dollar terms, at least, it's just kept growing under Liberal and Labor governments.

A better reason is there isn't a lot to worry about. Throughout the history of white settlement, Australia has always been a net importer of foreign capital because our scope for economic development has always been greater than we could finance with just our own saving.

And, as Treasury points out in this year's budget papers, there's now even less reason to worry than there used to be.

The net foreign debt is the partial consequence of a deficit that rarely rates a mention these days, the deficit on the current account of our balance of payments. (The balance of payments records all the transactions between Australians and the rest of the world.)

The current account deficit is usually thought of as the sum of our trade deficit (exports minus imports) and our "net income deficit" (our payments of interest and dividends to foreigners minus their payments of interest and dividends to us).

But it can also be thought of as the extent to which we have called on the savings of foreigners to fund that part of the nation's investment spending (on new homes, business equipment and structures, and public infrastructure) the nation has been unable to fund with our own saving (by households, companies and governments).

Actually, borrowing foreigners' savings is only one way to make up the saving deficiency. The other way is to attract foreign "equity" investment (ownership) in Australian businesses.

In December, when our net borrowing from foreigners totalled $760 billion, the net value of foreigners' equity investment in Australia was $110 billion, taking our total net foreign liabilities to $870 billion.

Our net foreign liabilities represent the accumulation of all our past current account deficits (and we've run such a deficit almost every year for at least the past 200).

Treasury makes the point that just because we don't save enough to finance all our annual new investment doesn't mean we don't save much. We save a higher proportion of national income (GDP) than many developed countries, and we've been saving a lot more since the early noughties.

Though governments are saving less, it's well known that households are saving a lot more. And companies are saving more by retaining a higher proportion of their after-tax profits. So national saving has risen to about 25 per cent of GDP.

Some of this rise has been offset by an increase in national investment spending, driven by the mining construction boom, which has taken national investment spending up to about 28 per cent of GDP.

Even so we've still reduced the gap between national investment and national saving to about 3 percentage points of GDP, which compares with an average of 6 percentage points in the years leading up to the global financial crisis. Treasury says this smaller gap (that is, smaller current account deficit) is likely to continue for at least the next two years.

Before the financial crisis, the dominant form of net capital inflow was "portfolio debt", Treasury says. This debt was held largely by our banks, but their foreign borrowing was really to meet the borrowing needs of their household and business customers.

Since the crisis, however, the household sector has ceased to be a net borrower and reverted to its more accustomed position as a net lender to other sectors of the economy.

The corporate sector (excluding the banks) is still a net borrower, but the mining companies in particular have funded a lot of their investment in new mining construction from retained earnings rather than borrowings.

Since the miners are largely foreign-owned, however, this use of retained earnings shows up in the balance of payments as an inflow of foreign equity.

This implies we've become less dependent on foreign borrowing to finance the current account deficit.

As part of this, our banks have been net repayers of their total foreign liabilities since mid-2010.

(The counterpart of this is that they've been getting a lot higher proportion of their funding from Australian household depositors, particularly through term deposits.)

One lesson from the financial crisis is that severe dislocations in foreign funding markets can impede the ability of even the most creditworthy borrowers (our banks, for instance) to obtain funds, even if only for a short time.

This helps explain our banks' subsequent move back to reliance on household deposits (made more possible by our households' changed saving behaviour, of course) and also their move to reduce their exposure to "rollover risk" (having trouble replacing a maturing debt with a new debt) by lengthening the average term of their foreign borrowers.

These days, 63 per cent of our foreign debt is more than a year from maturity, including almost a third with more than five years to run.

Finally, some people worry that, when we borrow in foreign currencies, a fall in our dollar would automatically increase the Australian-dollar amount of our debt. But Treasury points out, these days, almost two-thirds of our net foreign debt has been borrowed in Australian dollars.

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How multinationals rort our tax system

You're familiar, I'm sure, with the Double Irish Dutch Sandwich. It sounds tasty - but only to the big multinational companies that use it to avoid tax. According to the Assistant Treasurer David Bradbury in a speech he gave late last year, it's the device Google uses to pay very little Australian company tax on the profit it makes on an estimated $1 billion a year in Australian advertising revenue.

As Bradbury explains it (using media reports, he says, not inside information), the fine print of contracts Australian firms sign with Google says they're buying their advertising from an Irish subsidiary of Google.

Our rate of tax on company profits is 30 per cent, whereas Ireland's is 12.5 per cent. But that's just the start of the sandwich. The Irish subsidiary then pays a royalty payment to a Dutch subsidiary, but it's then paid back to a second Irish holding company of Google's, which is controlled in Bermuda - which has no company tax.

The media usually attribute the invention of the double Irish to Apple, Bradbury says. But evidence given to the British public accounts committee suggests Amazon paid no tax in Britain despite about $4.9 billion in sales by routing transactions through Luxembourg, where it faced an effective tax rate of 2.5 per cent.

The committee also heard that Starbucks had paid no tax in Britain for three years, despite sales totalling about $1.8 billion - in part because of royalty payments for the use of the brand.

With their government busy raising taxes and slashing government spending to get its budget deficit down, the Brits are pretty steamed up about multinationals not bearing their fair share of the tax burden. Governments in many developed countries are deciding tougher measures need to be taken to curb the multinationals' rorting of the system, and ours is no exception.

It's a problem governments have been grappling with for decades, of course, since the early days of globalisation and the rise of companies with operations in several countries. Then, the game was simply for multinationals to shift their profits to countries where taxes were low. One way to do this was for the part of the company where taxes were lower to sell its products to subsidiaries in high-tax developed countries at inflated prices. The big countries developed rules to limit such ''transfer pricing''.

Another trick was for a subsidiary to borrow from head office most of the capital it needed, with head office then charging an interest payment that absorbed most of the subsidiary's profits. Our ''thin capitalisation'' rule limits interest deductions to $3 of debt for each $1 of share capital, and there's talk this may be tightened in the budget.

In a speech he gave this month, Bradbury says you don't need to be doing business on the internet to use something like a double Irish scheme. ''What you do need is the global presence of a multinational enterprise and the ability to attribute a large part of your profits to intangible assets,'' he says.

And we know intangible assets - such as software, databases, patents, copyright and ''goodwill'' or ''brand value'' - play an increasingly important role in the global economy. In the United States, investment in intangible assets has exceeded investment in tangible assets for more than a decade.

Existing international legal arrangements rest heavily on the notion that income should be taxed in the country of its ''source''. When economic activity was dominated by farms, factories and mines, it usually wasn't hard to see that the source of income was where the factors of production were physically located.

But now ''the increasing importance of intangible capital to production challenges the very idea that we can always objectively determine where economic activity occurs,'' Bradbury says.

All this helps explain the emergence of ''stateless income'' - income that's not taxed in the source country of the production factors that gave rise to the income, nor in the ultimate parent company's jurisdiction. It's income that doesn't belong anywhere for tax purposes.

This, in turn, explains how the profits of US-controlled corporations in Luxembourg are equivalent to 18 per cent of its gross domestic product. For the Cayman Islands and Bermuda the proportions are more than 500 per cent and 600 per cent of those countries' gross domestic product.

Stateless income is not simply a product of transfer pricing abuses, but also arises from decisions about where to place financial capital within a multinational group. It involves exploiting differences in countries' tax systems and hybrid instruments treated as borrowings in a country and shares in another.

Tricks like these can place single-country businesses at a competitive disadvantage. They - and individual taxpayers - are forced to bear an unfair share of the tax burden. But many big-business executives reject the notion that paying a fair share of tax is part of a broader social compact. Tax is just another business cost. If dodging it is legal, morality doesn't enter into it.

The Gillard government is working to ensure our transfer-pricing rules are up with world's best practice and the general anti-avoidance provision of our tax act is broadened to encompass the tricks multinationals try on.

It has asked Treasury to study what more can be done, and will work to improve the information multinationals have to make public about profits and tax payments.

The Organisation for Economic Co-operation and Development has had to lift its game in promoting multilateral action to limit tax rorting by global companies.

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Facts count, because what's mined is yours

By far the biggest development in the economy in recent years is the mining boom, and it's likely to roll on for at least the rest of this decade. But Australians are having a lot of trouble getting their minds around the boom's implications. The area abounds with worries and misperceptions.

Economists keep banging on about the mining boom because it's the biggest factor driving the economy's growth. We've had a surge in export income because the world is paying such high prices for our coal and iron ore. And we're also getting huge spending on the construction of new mines and natural gas facilities.

The other reason economists get so excited about the topic is that this is hardly the first commodities boom Australia has experienced (the first was the gold rush) and most of our previous booms have ended in tears. We've quickly spent all the extra money coming our way, but that's led to rapidly rising prices. The authorities' efforts to stamp out inflation have ended up causing a recession and rising unemployment.

The present managers of the economy are determined to ensure that doesn't happen this time by keeping spending and inflation under control. This explains why, until recently, the Reserve Bank was always thinking about putting up interest rates, and why the Gillard government has been so keen to get its budget back into surplus.

But all the fuss people like me have been making about the boom has left many Australians with a quite exaggerated impression of the size of our mining sector. According to a poll conducted by the Australia Institute, on average people imagine mining accounts for 35 per cent of the goods and services the nation produces (gross domestic product).

But while mining's share of national production has increased significantly in recent years, it's still up to only 10 per cent.

Many of us see the main pay-off from an expanding industry as all the jobs it generates. So what proportion of the workforce is employed in mining? According to the Australia Institute's polling, our average answer is 16 per cent.

The truth? Even after all that expansion, less than 2 per cent. How could an industry responsible for 10 per cent of our production account for just 2 per cent of employment? By being intensely ''capital-intensive'' - by using a lot of machines and not many workers.

So, does that mean mining isn't really worth all the fuss? A lot of its industrial rivals will tell you so, but it ain't true. The true test of the worth of an industry is not how many people it employs but how much income it generates. And, particularly at present, mining is generating huge income. Do you realise it accounts for more than half the nation's export income?

The reason income trumps employment is that as income is spent it generates jobs. When you spend a dollar it percolates through the economy, supporting and creating jobs as it goes. So if mining creates 10 per cent of national income but only 2 per cent of national employment directly, that just means it supports another 8 per cent of national employment indirectly, in other (labour-intensive) industries.

Which other industries? For the most part, service industries. How can I be sure? Because after you allow for the 2 per cent of Australians employed in mining, the 3 per cent in agriculture and the 9 per cent in manufacturing, the remaining 86 per cent are employed in the many service industries: wholesaling and retailing (15 per cent), healthcare (11 per cent), construction (9 per cent), education and training (8 per cent), the professions (8 per cent), hospitality (7 per cent), public administration (6 per cent), financial and business services (6 per cent), transport (5 per cent) and many more.

Another reason I can be sure most of the jobs created indirectly by mining are in the services sector is that, for at least the past 40 years, all the net increase in national employment has come from the services sector.
Am I touching a nerve here? A lot of people are uncomfortable about the mining boom because they see it as temporary and they see digging stuff out of the ground as a pretty unsophisticated way to make a living. What do we do when it's over and what else do we do to make a buck?

It's true the sky-high prices we're getting at present won't last, but nor will they crash back to what we used to get. And we'll have a much bigger mining industry selling a lot more of the stuff than we used to. They may be non-renewable resources, but we've got a mighty lot of 'em.

What else can we do? What most of us have always done: sell services to one another and to foreigners. In these days of the information and communication revolution, most of the highly skilled, highly paid jobs are in the services sector. Those who find this intangibility discomforting are hankering after a bygone century.

It is true, however, that we must ensure we end up with something to show for this boom and that too much of the huge profit being made doesn't just end up in the hands of the mining industry's owners (about 80 per cent of whom are foreign). After all, the minerals they're mining are owned by all Australians, not the miners.

That's why it's good to see Julia Gillard's profit-based mining tax finally being passed by the House of Representatives, even though Tony Abbott's mindless opposition to it allowed the three big foreign mining companies to butcher the tax.

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The price we would pay for keeping the farm

According to the Greens, the mining industry is 83 per cent foreign-owned. And their anxiety is matched by Senator Barnaby Joyce's worries about foreigners buying up rural land in NSW. But how concerned should we be about "selling off the farm" and what could we do about it?

The Greens' claims have not gone unchallenged. According to the Minerals Council, official figures show mining is actually 71 per cent foreign-owned. The Greens say BHP Billiton is 76 per cent foreign-owned, but the correct figure seems to be 60 per cent.

No one's disputing, however, that Rio Tinto is 83 per cent foreign-owned and Xstrata is totally foreign-owned. And even if the mining industry overall is "only" 71 per cent foreign-owned, that's still a remarkably high proportion.

What's more, the funding for the present huge expansion in the mining sector, which is likely to continue for quite a few years, is safe to come mainly from foreigner investors. If so, their share of the ownership of our mining companies is bound to go higher.

So why don't we just pass a law prohibiting foreigners from buying Australian mines and farms - or at least limiting foreign purchases in some way?

Sorry, it ain't that simple. Before we did that, we'd need to be sure we were prepared to pay the price of keeping what's left of Australia in Australian hands.

All spending on new physical investment - whether on homes, business equipment, mines and other structures, or public infrastructure - has to be financed by saving. For every $1 billion we invest this year, the money has to come from somewhere and, in fact, it has to come from us saving $1 billion this year.

The saving can be done by households, by companies retaining some of their after-tax profits, or by governments raising more in revenue than they spend on recurrent purposes. There's just one escape clause: we can also finance our investment spending by using the savings of foreigners.

We can either borrow from them - thereby adding to Australia's foreign debt - or we can sell them some Australian asset: real estate, an existing business, shares bought on the stock exchange or the right to set up a new business with their own money.

If we borrow their savings, the money will have to be repaid in due course, and we'll have to pay interest to them. If, instead, we sell off part of the farm, the after-tax profits the foreigners make from their share of the business will belong to them. They can either reinvest those profits in the business (which will increase the amount of the farm they own) or take them out of the country.

The Greens estimated that, over the next five years, the foreign owners of our mining companies will be entitled to after-tax profits of $265 billion, but will reinvest four dollars in every five, taking home only about $50 billion.

I'm not sure how accurate those figures are, but they do illustrate a point about which everyone agrees: a very high proportion of the big profits foreigners are making from our mining sector is being ploughed back into expanding the sector.

Does all this shock you? It's been going on, year after year, pretty much since white settlement. Because this is a big country packed with natural wealth, but with a relatively small population, Australians have never saved enough to finance all the abundant opportunities for economic development and enrichment.

So we've always invited foreigners - first the British, then the Americans, then the Japanese and now, to some extent, the Chinese - to bring their capital to Australia and join us in fully exploiting our nation's potential.

In other words, we've always been a "capital-importing" country. We've almost always run a surplus on the capital account of our balance of (international) payments, with more foreign capital funds flowing in than Australian capital funds flowing out. These funds include borrowed money and money for the purchase of physical assets and businesses ("equity" capital).

(It's worth remembering, though, that in recent decades we have had a lot of Australian money flowing out as our superannuation funds have invested in foreign shares and bonds, and Australian transnational corporations have expanded abroad. So while the rest of the world has been acquiring more of Australia, we've be acquiring more of the rest of the world.)

If we almost always run a surplus on the capital account of the balance of payments, it follows as a matter of arithmetic that we run an exactly offsetting deficit on the current account of the balance of payments. Thus the capital account surplus allows our exports to exceed our imports and covers the cost of our net payments of interest and dividends to the foreign suppliers of capital.

But why have we always invited foreigners to bring their savings to Australia and participate in the economic development of our nation? Because of our impatience to be richer, our desire to raise our material standard of living.

And because, as part of that, we've always been confident we were getting our fair share of the benefits. Any profits the foreigners make, we tax. Any minerals they extract from our land, we charge them royalties (though, with world commodities prices so high at present, probably not enough, which is what the new mining tax is about). But the benefits of economic activity exceed the profits made. It also generates a lot of jobs, directly and indirectly. Those jobs go mainly to Australians and help feed their families.

We could perhaps borrow more from foreigners so as to reduce their ownership of our real estate and businesses, but there are limits to how far debt can substitute for equity and limits to how much debt the nation should take on.

So if we want to impose new restrictions on how much foreigners own, it's pretty safe to involve less economic development, slower economic growth than we were expecting and a more slowly rising standard of living.

That wouldn't worry me much, but many people would see it differently. Point is: don't imagine restricting foreign ownership would come without a price to be paid.

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