Sunday, April 24, 2011

Resource wealth must be saved for the national good

The 'rocks' in the ground belong to all Australians, writes Paul Bloxham.

Australia should have a mining tax and a sovereign wealth fund. Both of these would allow better management of our national wealth.

Australia is converting part of its vast resource wealth - the ''rocks'' in the ground - into cash. The lion's share of this cash is flowing directly to the mining companies, while only a small part is being retained by the Australian people (by flowing back into the general fiscal accounts).

Indeed, in a pre-budget speech, on April 20, the Treasurer, Wayne Swan, explicitly pointed out the differences between the mining and non-mining sectors. He says: ''Over 2010, mining sector profits grew 59 per cent, while non-mining profits fell slightly''.


Not only is the mining sector highly profitable but, as the Treasurer also says, it is making significant tax deductions as it expands its capital base, reducing its effective tax bill.

Poignantly, Swan says, the ''mining boom Mark II will have all of the pressures of the first boom, without the surge in [government] revenues''.

Even the most casual observer may suggest that this is because we lack an appropriate mining tax to redistribute these returns across the economy.

And even more important than redistributing the returns across the economy, is redistributing them across time. That is, saving the funds for future generations and for future problems. To achieve this we should set up a sovereign wealth fund, just as many countries with huge commodity wealth have already done.

To understand why this issue is so important one needs to step back and look at the big picture. Australia is now going through the largest rise in the terms of trade in its history on the back of the single biggest change in the history of the global economy: the re-emergence of China and India as economic giants.

While this re-emergence could take a number of years it will not be repeated, which means that commodity prices are likely to come down at some point.

Because global investment in resource supply capacity is ramping up there is already uncertainty over how long commodity prices will stay at their historic highs.

Suffice to say, it is wrong to assume that the boom times will last forever - they never do. Given this uncertainty, Australia ought to be using this unique period to save for the future.

Unfortunately, for a number of reasons - politics on the run, successful lobbying by mining companies or the general public's disdain for taxes - the issue of a mining tax has become political poison. But this is no excuse to back down.

This is one of the biggest issues facing Australia and sensible discussion needs to continue. The longer commodity prices stay high, the more pertinent these issues become.

Mining taxes are a balancing act. Tax too heavily and mining companies will have little incentive to invest, which creates jobs and spreads incomes. Tax too little and mining companies will make super profits (more than is needed to give them the incentive to operate).

The extent to which mining companies are undertaking share buybacks, paying higher dividends and making investments from retained earnings leaves little doubt that they are making super profits.

Putting exact figures on the appropriate extent of taxation is hard. Not only does it require a quantitative assessment of the value of mineral resources - both now and through time - but a qualitative assessment of how much tax is fair and efficient.

One way to help determine an appropriate mining tax would be to calculate the full value of the raw materials - part of our national wealth - and assess a reasonable return on these assets.

After all, the Australian people own the natural resources and, via the government, lease the rights to sell these commodities to extraction service specialists - mining companies. At this stage, no such accounts exist.

Of course, calculating the full value of these resources would require assumptions about how long the higher level of commodity prices will last and an assessment of how much to discount the future. While this is not easy to do, it should nonetheless be the approach taken.

Keep in mind that this is no more difficult than determining a price for carbon. Indeed, it is somewhat ironic that the national debate is about internalising an externality in the financial system - carbon - when the current accounts do not properly internalise the value of our national wealth.

Including the value of resources in our accounts would be a start to a more informed debate about how to manage our national wealth. It would also help in determining an appropriate level of taxation and whether more of this ''liquefied'' wealth should be saved for the future - in a sovereign wealth fund.

Put simply, we own the ''rocks'' and are retaining only a fraction of the income from their sale. At some point commodity prices will fall and we may then assess that we should have saved more. It will be too late.

Source: http://www.smh.com.au

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