It must be budget time again, because consultant Chris Richardson has emerged to prognosticate on the state of the national finances in one of the more pointless rituals of the fiscal calendar.
In a special treat, we’re having it twice in 2022 due to Labor deciding it wants its own crack at the 2022-23 budget after the previous government had a go in late March.
Richardson’s predictions were used by The Australian Financial Review to warn “tax payments as a share of the economy have hit a 16-year high and could surpass the former Coalition government’s tax cap”.
To which the appropriate answer is, so f***ing what? The Coalition’s “tax cap” of 23.9% of GDP was a piece of political fiction designed to obscure the fact that the Coalition was the big-taxing party of Australian politics under successive governments. And it was utterly inappropriate given that the Coalition permanently increased spending to 27% of GDP or thereabouts, locking in a decade of deficits back in March.
Only at the AFR would something so discredited still be taken seriously.
We’re also warned over and over again about the “windfall” nature of tax revenue sourced from energy and mineral exports, which are set to deliver a surge in tax revenue courtesy of the war in Ukraine and sanctions on Russia.
It’s true that extraordinary external circumstances have seen a big spike in energy prices, although they’ve fallen from the highs of earlier this year. And as we’ve found in previous budget cycles, overestimating the price of iron ore can lead to big swings in revenue for the Commonwealth.
But treating mineral and energy receipts as random “windfalls” that are in effect a sugar hit to government coffers only serves the interests of mineral and energy companies and their media cheerleaders.
Today, for example, New Hope Corporation (controlled by prominent Liberal Party supporters the Milner family) showed that it has become the latest once marginal, now viable thermal coalminer to benefit from the Ukraine invasion. New Hope reported a 1200% jump in net profit to A$983 million in 2021-22. It did pay a big increase in tax: $417.6 million on a pre-tax result of more than $1.4 billion compared with $31.3 million on a pre-tax result of just $110 million. That’s all thanks to thermal coal prices surging from less than A$100 a tonne back in mid-2021 to more than A$400 at the end of the financial year (and they remain above A$400 today).
New Hope joins other previously marginal coalminers such as the Chinese-controlled Yancoal Australia and the locally owned Whitehaven. Both reported much larger results than New Hope — well over A$2 and A$3 billion.
The question is: is that enough tax or should companies using the country’s patrimony be paying more (after all the usual deductions such as depreciation and wages)?
Australia is a mineral and energy superpower, and will continue to be so into a decarbonised future. In fact, if anything, our ownership of vast stores of crucial renewables-economy minerals like copper and lithium will present revenue opportunities as big as those from gas and coal.
Prices will fluctuate with external events, but as the world transitions to renewable energy, gas, coal and oil prices will become less important, while mineral exports become ever more lucrative.
The “windfall” mindset obscures the fact that Australia should be ensuring that it is maximising its tax revenue from these exports, not treating them as a lucky dip that isn’t part of core fiscal policy. We’re already missing out on billions in tax revenue from gas exports because of badly designed tax arrangements for offshore gas. The risk is we fail to lock in appropriate tax arrangements for the next generation of big export revenue earners.
Minerals and energy are a core part of our economy. We tell ourselves that somehow these industries are too simple, that Australia isn’t sufficiently “complex”, that we should be moving up the value chain and into complex manufacturing. But those resources are a key national advantage, and we exploit them effectively. Our mining industry is the most advanced and innovative in the world, far ahead of the US in the exploitation of autonomous mining vehicles and remote-controlled trains, for example.
The results of that innovation and efficiency are not “windfalls” but the consequence of natural advantages coupled with a stable government, open markets, a highly educated population and strong capital markets backed by massive national savings — advantages few of our competitors have.
Instead of separating mining and energy revenues into a special category that can be forgotten when thinking about tax policy and how to address the structural deficit the Coalition handed us, it should be central to how we understand our economy and the sources of revenue to pay for a higher level of government spending.
Glenn, resources are a core part of Australia’s economy – we need to take this seriously in our tax system, and they should be taxed more heavily. I used to be an investment analyst with one of our very big mining companies.
In addition to company tax resources companies pay royalties because they are selling “our” minerals and petroleum. In WA most royalties vary with price, so we benefit from price spikes. This doesn’t just benefit WA, as the GST split still includes “horizontal equalisation” to effectively share the benefit. Royalties should be higher and include a floor rate.
The swings and roundabouts from resources income are real. The unstable revenues could be modelled by boffins, such as thermal coal going down while lithium comes up, to predict expected revenue we could rely on and include in the operating budget. The sensible thing would be to put aside any peaks for capital spend like submarines and social housing, not to lock it in year on year. WA does something like this, we are spending our current iron ore peak on metro net rail. But we are not increasing ongoing spending like public service pay.
The most important thing is to put change in place now to systematically increase royalties for new investments – even if companies threaten to walk away. It is tricky to increase existing ones because companies making decisions need to know the rules of the game and be confident they are not going to change; we are known for stable rules, and they help Australia to attract investment. That’s what people mean by “sovereign risk”. There are plenty of other good places to invest!
If we are going to change the rules of the game for existing investment I have a couple of ideas. Given the really extraordinary profits due to the war in Ukraine we might be a windfall tax for major world events. I’d suggest this include all the big beneficiaries including sales of grain (cue howls from farmers). Even more controversially we could apply a super profits tax to all industries. This needs careful design against accounting manipulation – the Gillard super profits tax would have raised didley squat.
Sorry for the very serious and long post!
But a good summary. We may disagree on details but yes a resources tax used to build infrastructure for the benefit of all Australians as opposed to profits to the filthy rich. No wonder my sibling bangs on about living in the West all the time. Yes I use the Metro Rail when I visit.
Yes ALL of us own these resources, and they should be heavily taxed for all the reasons that are talked about. Are there other countries where the Miners et al get such a free ride? Do you think they would stop coming here if they had to pay some tax? At present these poeple are rent seekers wiht and inside running getting a free ride set up by the LNP
Doesn’t one of the middle-eastern countries export the SAME amount of LPG (or something) as we do, and they make $8 billion/year out of it? We make $800,000/year…sooo good at just giving stuff away, which belongs to all the Australian people.
I think this is about right…I heard it on ABC Radio…but stand to be corrected.
“In 2020, Australia overtook Qatar to become the world’s largest exporter of LNG. Yet, Qatar collects a massive $26.6 billion in annual royalties alone from LNG, according to Tax Justice Network Australia. Australia, by comparison, collects a measly $1 billion annually.”
https://michaelwest.com.au/fossil-fuel-fiesta-australias-coal-and-gas-giants-get-more-in-subsidies-than-they-pay-in-royalties/
Why do we continue to use ‘GDP” as any sort of reasonable measurement tool?
Why do certain commentators insist on using ‘average’ taxable income instead of ‘median’ taxable income as a relevant measure? Obvious that those who are trying to hide the ‘lived truth’ of many Australians need to be replaced.
And why “taxable income” instead of just the actual income?
As there are ways to reduce taxable income, using that measure for comparisons can be very misleading.
Im in the windfall camp. These people are getting personally very wealthy on the national assets which all Australians, present and future, should be entitled to benefit from. Windfall tax good.
Well said, except maybe we should be moving up the value chain in terms of processing valuable minerals here, instead of sending them overseas for processing. Less wasteful for the environment, for one thing.
A good argument unless you happen to have your hand in the back pocket of those making the super profits. And both major parties are guilty of that.