THE reduction to the 30 per cent minerals resource rent tax (MRRT) is a positive political step for the Gillard Government in light of the looming election.
What remains to be seen is how the Government is going to address the broader economic implications in terms of the obvious budget hole that her mining deal has left. We’re still not sure why the Government has chosen to “put all of its eggs” in one basket (so to speak) relying on just one industry. Perhaps the question we should all be asking is where is the tax on other super profit industries, such as banking? Would it not be fairer to share some of the load around?
Since its first announcement on May 2 2010, the then Resource Super Profits Tax (RSPT) introduced by the Rudd Labor Government sparked substantial public debate polarising different stakeholder groups.
The RSPT was proposed as a way to allow the Australian community to have ‘a fair share’ in the profits reaped from our resource rich country by taxing ‘super profits’ (over the Government bond rate). The RSPT was never going to be an easy tax to sell. With the GFC still sharp in our minds, the lack of industry consultation or support for the tax and a looming election it was starting to look like the tax that was not meant to be.
With the election at the forefront of the Government’s mind and opinion polls rallying against Rudd, Gillard pounced on her opportunity to launch a coup de tat replacing Rudd with Australia’s first female Prime Minister on 24 June 2010. Her first priority as Prime Minister was to show up Rudd’s stubborn approach and enter into meaningful negotiations with the resource industry, resulting in an agreed compromise announced on Friday 2 June 2010. The bargain struck delivered some significant comprises which only a short time ago seemed unachievable.
Theoretically the RSPT has many merits. Originally, the tax was set at 40% of all profits made over the long-term bond rate (initially set at 6%). It was estimated that the RSPT would return $12 billion by 2012-13 and increase mining investment by 4.5%, jobs by 7% and mining production by 5.5% in the long term. The Government planned to invest $1.1 billion over two years commencing 2012/13 into a new Resource Exploration Rebate to provide better support to resource exploration companies and reinvest part of the revenue into an ‘infrastructure fund’ to assist in alleviating the current pressures on mining infrastructure.
In vestments were also planned into the current superannuation schemes to boost superannuation pay to 12% and provide tax breaks to small businesses. It was also said to prevent excessive leakages of returns from Australian owned resources to international investors, and to enable the Budget to return to surplus (of $635 million) by 2012-13.
Under the new look tax agreed through consultation with mining giants BHP Billiton, Rio Tinto and Xtrata, the headline rate of the RSPT will be dropped to 30% on super profits made above bond rate plus 7%.
To achieve this, the Government has had to relinquish significant ground and have announced a reduction of the proposed cut on company tax to 29%. It also looks like the planned Resource Exploration Rebate may be on the chopping block and other investment plans and reform agendas are to be delayed.
The big questions is; what are the real casualties of the reduction in the predicted $12 billiion RSPT bail out? Gillard finds herself in a tough place. On the one hand, the RSPT was never going to fly in its initially proposed form.
On the other, there is some real pressure on the Government to return the budget to surplus and steer clear of other sovereign debt woes of our European counterparts. The return to surplus in 2010/2013 has been touted as a measure that would place Australia as a leading world economy.
An economy in budget deficit can be a positive thing as it stimulates economic growth through Government spending, which is what occurred during the GFC. However, if the deficit results from a reduction in revenue stream (rather than an increase in spending), some of the luster falls away.
It is argued the RSPT is merely a ‘money grabbing’ operation killing the goose that laid the golden egg as it was the mining industry’s exportation that substantially limited the effect of the GFC on the Australian economy. So Gillard had little choice but to make some serious concessions.
But until Gillard explains the full extent of the impact that the MRRT concessions have on the promised benefits to other industry and to small business, she will remain under pressure from various stakeholders.