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Swan's price gymnastics

Stephen Bartholomeusz

Published 10:00 AM, 15 Jul 2010 Last update 10:14 AM, 15 Jul 2010


So now we know. The election-driven decision to gut the proposed resource tax on super profits wiped $7.5 billion off the government’s forward estimates of revenue and would have left the budget in deficit if it weren’t for the very convenient revision of commodity price forecasts.

’Parameter variations’ – an extra $6 billion in 2012-13 and 2013-14 – that were somehow discovered at the instant the government reached an agreement with the big miners to replace the reviled resource super profits tax with the more miner-friendly mineral resource rent tax relate to still undisclosed upwards revision to commodity price assumptions.

Without that windfall the expected net revenue from the RSPT – $3 billion in 2012-13 and $9 billion in 2012-13 – would have been halved, raising only $2 billion in its first year and $4 billion in its second. In fact, given that the government ditched the tax offset for exploration as part of the revised resource tax arrangements, the revenue foregone would have been $7.5 billion.

The MRRT, of course, not only has a less punitive headline rate (effectively 22.5 per cent versus the RSPT’s 40 per cent) but a raft of other concessions including a more generous uplift rate and the option of using market value as the base on which calculations of the tax are made. It also only applies to iron ore and coal, with an extension of the petroleum resource rent tax to onshore oil and gas.

Thus it isn’t surprising that the changes tore a hole from the original budget estimates. The conundrum was always how such major concessions could reduce the forecasts revenues by only $1.5 billion, to $10.5 billion. Now we know.

Either the government severely underestimated the revenue that would have been generated by the RSPT – if the new commodity price assumptions produce $6 billion more revenue under the MRRT the RSPT may have produced multiples of that on the same assumptions – or it is being overly optimistic in its revised outlook.

It is worth noting that since the May budget iron ore prices have been falling steadily and quite significantly and the swaps market is signalling further deterioration over the coming months. The assumption that the terms of trade will increase 17 per cent this financial year to their highest levels on record is brave. With China’s economy slowing and the outlook for the rest of the world troubled and clouded, any medium-term optimism needs to be treated with some scepticism.

It is also worth pointing out that, if the assumptions hold true, the RSPT would have raised a hell of a lot more than $12 billion in its first two years. That could be seen as either a massive lump of windfall revenue from the assumed commodity boom foregone, or a chilling impost on investment in the sector avoided.

The beauty of the revised forecast is that not only does it enable the government to say that its backdown on the RSPT costs it a modest net $1.5 billion but by abandoning the tax offset for exploration, the early cut to small business company tax and halving the general reduction in the corporate tax rate it can actually claim the surplus in 2012-13 will be $3.1 billion rather than the $1 billion forecast in the budget.

Mind you, the politically convenient windfall from the MRRT might be short-lived, given that commodity prices are assumed to start falling in the later stages of the forward estimates and continue declining into the medium term as the supply-side response gains momentum.

So, that $4 billion forecast for 2013-14 might, if the near-term assumptions hold up, provide a reasonable guide to the longer term impact of the MRRT, assuming that volume increases from expanded capacity at least offset the effects of commodity price declines.

No wonder BHP Billiton, Rio Tinto and Xstrata, confronted with the prospect of the RSPT, came away from Canberra smiling after negotiating its replacement with the MRRT.




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5 Comments


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David Mortimer wrote:

Gee Stephen, you waited until two thirds of the way down your article to make the major point: the original tax was set to raise way more than stated. But how much?

(See Swan's price gymnastics, July 14)

I am interested in what is "a hell of a lot more". Keep up the good work.

14 Jul 2010 3:16 PM

Digi C wrote:

You wouldn't want to base any estimates of anything on the word of an 'economist', unless you were to bet against it of course.

(See Swan's price gymnastics, July 14.)

I'm guessing that's what Swan is doing with his revised estimates. He's been told the commodity prices will drop in the latter half of the year therefore he's based his decision on the non-rural commodities market remaining buoyant. Smart.

14 Jul 2010 4:33 PM

David Singer wrote:

Swan is engaging in economic chicanery. (See Swan's price gymnastics, July 14).

Relying on the receipt of taxation revenue to be applied to specifically allocated purposes that is dependent on the future movement of prices in commodities markets is totally irresponsible.

If a public company were to engage in such conduct it would be open to charges of deceptive and misleading conduct.

Politicians are apparently free to engage in this reckless conduct, which could falsely influence voting intentions and share prices of companies affected by the proposed new tax.

14 Jul 2010 5:59 PM

Dao Nguyen wrote:

We all know that to bring in a new tax politicians have to publish under-estimates of its collection but do the reverse in budget deficit estimation to impress voters. (See Swan's price gymnastics, July 14.)

It seems Treasury economists have been well trained and learnt the politician's conservative bias trick well since Howard-Costello's public service reform. However, their forecasts are credible if the dollar devaluation takes place, otherwise the public service's apolitical stand is questionable and may be devalued in place of the dollar.

14 Jul 2010 7:02 PM

John Flynne wrote:

The real issue that is being ignored is the revenue is not be put aside for the future when we do not have the resources. (See Swan's price gymnastics, July 14.)

It is a very glib dishonest debate.

15 Jul 2010 0:30 AM



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