Speech - A Stronger Economy And A Fairer Share For All Australians




"A Stronger Economy And A Fairer Share For All Australians"


MONDAY, 24 MAY 2010


The Government's plan for a stronger, simpler, fairer tax system was announced three weeks ago. Since that time, it has been the subject of robust debate around the country – particularly on the Resource Super Profits Tax. We welcome this debate about the future of our economy, and we hope it continues.

It is important that debate remains constructive – contributing to increased public understanding and a robust design for the RSPT. Inaccurate information and scare campaigns risk getting in the way of this, undermining the important work we must do to strengthen our economy and secure higher living standards for working families.

We must not lose sight of the key aim of the policy – to ensure a fairer share of the proceeds of the resources boom are invested in a stronger economy for all Australians. We will do this by replacing royalties with a Resource Super Profits Tax (RSPT) and directing the proceeds to higher retirement savings for Australians, more roads, rail and ports, and less business tax and red tape, especially for small business.

The Australian people own 100 per cent of Australia's natural resources and they deserve a fairer share of the super profits mining companies make, particularly during this boom. As these profits have risen in recent years the Australian people's share of those profits has fallen.

Before the last boom, the country got $1 in every $3 of mining profits through royalties and resource charges but at the end of that boom, that was down to just $1 in $7. It is impossible to justify a system where Australians pay proportionately more tax as their income goes up, while mining companies pay proportionately less as their profits go up. The companies have been unable to justify this, and I cannot let the situation stand.

Profits were over $80 billion higher in 2008-09 than in 1999‑2000 yet governments only collected an additional $9 billion in revenue. The Government simply wants to take the Australian people's share of mining profits back to around where it was in the early 2000s. The Howard Government was not overtaxing the resource sector then, and this Government won't either. In fact, we will get the same share with a more pro-investment tax structure.

The reforms will broaden and strengthen the economy, ensuring all sectors grow in a sustainable way that benefits all Australians. They finally grapple with the policy failures of past mining booms by ensuring the resource and non-resource sectors grow together, not apart.

We have analysis to support this. Independent modelling by KPMG Econtech of the RSPT and the effective abolition of royalties says resource investment increases by 4.5 per cent, resource sector employment by 7 per cent and resource sector output by 5.5 per cent. The modelling also shows that the tax reform package – including the RSPT and our cuts to company tax – will actually reduce the price of food and housing.

National Conversation

In the last week I have travelled across most Australian states discussing the story of our Budget, a story of our nation's successful navigation of the global recession. I have also been discussing our economic plans for the future, including our important tax reforms.

I've met with big miners, and smaller miners. I've met with some of the people who will pay more tax given current high profits under our proposal. I've also met with many of the businesses who will pay less.

People have explained their concerns about how the last boom was handled, how capacity constraints and an infrastructure deficit choked growth. I've also spoken to South Australian and Victorian manufacturers, and Queensland tourism operators, who have outlined the challenges created for them when the dollar is high.

As a Queenslander, I recognise the particular importance of resources to my state, and also to Western Australia. I've seen the problems of infrastructure deficits in cities and towns along Queensland's coasts. My many visits to Western Australia have convinced me of the need to keep reinvesting in the resource-producing regions.

The Government's infrastructure fund is designed to do just this. It will provide a permanent structural source of funding for infrastructure, especially targeted at resource states and regions. It will start at $700 million in 2012-13, and grow over time, delivering more than $5.6 billion in additional funding over the next decade.

Countering the Myths

I welcomed the opportunity over this past week to get out and engage directly with businesses, especially the mining sector. Now, I'm the last person to stand up and tell this House the miners are all thrilled with our plans. Those who will pay more tax are unhappy, and I won't whitewash that.

But you can't make big reforms, and you can't attempt to remedy the policy failures of past mining booms, while keeping everybody happy. It might be the job of those opposite to pretend you can, but government is a very different and harder business.

I used my time with miners this week to explain the core design features of our RSPT. I discussed with them that we were effectively abolishing royalties by refunding them against the RSPT. That the 40 per cent rate is fair because it gets us closer to where our tax take was in the past. It is also the rate of the existing resource rent tax that has been operating for 23 years.

Sometimes in these discussions I heard a few myths, and I want to deal with those now.

The first is that this tax threatens Australia's economic prosperity.

Nobody disputes that the existing arbitrary and continually changing state royalty regimes result in less mining investment, fewer mining jobs and less mining production. Royalties tax production and ignore the costs involved in generating that output. Many of our mines shut down too early, while others can't ever get off the ground. It also means we poorly manage our resources – we leave too many commercially viable resources in the ground, purely because royalties make them uneconomic.

Similarly, all reputable economists agree that resource rent taxes like the RSPT do not affect investment, jobs or production. I encourage members to read the article by Ben Smith from the Australian National University in today's Canberra Times, or other pieces by Professor John Freebairn from Melbourne University and of course, Professor Ross Garnaut.

Second, some have claimed the RSPT is a triple tax on mining.

The leader of the miners' campaign, Clive Palmer, even talked about a 70 per cent tax. This is blatantly false and has never been substantiated. The RSPT will not be imposed on top of royalties and company tax. It will effectively replace royalties by providing firms with a refundable tax credit for royalties. Where royalty payments are higher than the RSPT liability, firms will get a cash refund for the difference.

The RSPT is also deductible against company tax. Regrettably, even some sophisticated commentators have talked about the theoretical maximum tax rate of 56.8 per cent as if every project will pay that rate. This is also incorrect for a number of reasons.

One reason these estimates are wrong is that they ignore that the RSPT only taxes super profits, not all profits. If a project does not generate super profits it does not pay any RSPT. And it will benefit from a company tax cut to 28 per cent and the government refund on the royalties it pays.

Firms that have lower profit levels will have a lower effective tax rate – for example, on reasonable assumptions a project with a risk-free return of 15 per cent — still very healthy – might still have an effective tax rate of 45 per cent.

However, even this calculation is an over-estimate, because it does not allow for the generous company tax concessions that mining companies benefit from.

The effective company tax rate for mining companies is well below the statutory company tax rate. This is due to a range of concessions that benefit the mining industry, in particular generous deduction concessions.

Independent research published by the National Bureau of Economic Research, and co-authored by Professor Douglas Shackelford and Kevin Markle, looked at company tax concessions across industries and countries. They found that domestic mining companies in Australia face an effective rate of 17 per cent and multinationals face an effective rate of 13 per cent. This is well below the statutory company tax rate of 30 per cent.

Perhaps the most pervasive myth is that every return over 6 per cent will pay Resource Super Profits Tax. I regret to say this is a calculated and deliberate misrepresentation. If you hear a mining executive saying it, they are either lying to you or they are ignorant – either way it should be of concern to their shareholders.

It deliberately ignores three offsetting elements of the tax design. Royalties are being rebated; RSPT is deductible against company tax; and the company tax rate is being cut. Once you add the combined effect of these elements, a project earning 6 per cent in fact pays substantially less tax under our reforms.

So for those – especially those opposite – who say the uplift factor is somehow a tax on entrepreneurialism, I say this: compare the RSPT to current royalties, which tax every dollar of return you get. But they don't stop there. Royalties also tax your wage costs, your operating costs, this on top of applying to your investment costs. Royalties tax you before you even make a profit.

Another myth is that the economic impact of taxes depends only on how much money they raise. Every serious economic commentator understands that different taxes have different impacts, depending on how they are structured.

A core finding of the independent tax review is that raising a dollar of revenue through different taxes has different impacts on growth. Royalties are one of the worst taxes for growth, resource rent taxes are one of the best.

Shifting revenue from royalties to resource rent taxes increases growth, including in the resource sector. This is because it reduces the tax paid by the smaller, more marginal mines, and increases how much we charge for the use of the highly profitable mineral deposits. And because they are highly profitable, production will continue regardless.

That is why these reforms will improve our economy. The Government's very strong view – and the Treasury's view – is that our reforms will grow the mining industry and the broader economy in the longer term. Again this is supported by independent economic modelling.

Investing the Proceeds

So let me talk about those benefits of the package as a whole for a minute.

Mr Speaker, all revenues from the RSPT will be used to deliver a stronger economy for Australian families. About a third of the package will directly assist the resources sector. This will be delivered through the Resource Exploration Rebate and the new ongoing infrastructure funding.

Our plan will also improve the competitiveness of the entire economy. It will deliver a company tax rate cut for all companies. The general company tax rate will be cut to 29 per cent from 2013-14, and to 28 per cent from 2014-15. Small business will get a head start, with the rate cut to 28 per cent for them from 2012-13.

Small business will also have access to instant write-off of assets up to $5,000 and a single depreciation pool for most other assets.

These changes promote growth across the entire economy, giving some of our other industries a better chance to compete on the world stage, even with the continued success of our resource industry.

We are also determined that Australia should have something lasting to show, from the sale of our non-renewable resources. We cannot squander the next boom like those opposite squandered the last one. That is why the Government will boost national savings.

We will boost savings through an increased Superannuation Guarantee, phased over ten years. We will also boost savings by making superannuation concessions fairer for low income earners, and we will provide more generous contribution caps for over 50s looking to make catch-up contributions to superannuation. And we will introduce a 50 per cent tax discount on interest income, including on deposits held with any bank, building society or credit union, as well as bonds, debentures and annuity products.

Nature of the Debate

Mr Speaker, let me comment on how this debate has played out over the last few weeks. As I said earlier, I didn't expect our reforms to be greeted with singing miners in the streets. Nor did I expect any support for strong economic reform from an Opposition that showed last week it has completely lost what little grip it ever had on economic policy.

If you really want to judge whether to believe the Liberals' scare campaign, look at what they do, not what they say. In the very week they were saying the mining industry would totally collapse, one of their most senior frontbenchers was off buying shares in BHP, because he thought they offered good long-term value.

But let me talk about the reaction from the sector more generally. I welcome Ross Garnaut's call for a rational and reasoned debate on the RSPT – a call echoed by John Hewson. As Professor Garnaut has said, the campaign against the RSPT has been long on rhetoric and threats, and very short on reasoned argument. John Hewson has said that a lot of posturing is going on, but in policy terms this tax is right.

Ben Smith, one of Australia's leading resource economists, wrote today that:

"the natural reaction is to think that the industry's predictions about its impact may well be correct. In fact, they are entirely false."

He goes on to say:

"In fact, the only danger to future exploration and mining activity is the possibility that suppliers of finance might believe the industry's rhetoric."

And David Buckingham, a former head of the Minerals Council, has lifted the veil on the hysterical scare campaign that some miners are waging.

Company Reactions

Mr Speaker, I have a lot of respect for the leaders of our business community and value their constructive input to any number of political debates. I say this publicly and I say it privately to them when we regularly meet or talk on the phone.

I expect a healthy amount of argy-bargy and brinkmanship with some people in business who don't want to give up any of their super profits. And I understand their position. But even the mining bosses in their heart would know that there is a rolled-gold case for a fairer way to tax the industry. Their own submission called for a profits-based tax.

Unfortunately, we have had a relatively small number of large companies choosing to conduct a vocal and public campaign. It has also been very strategic: companies have taken turns issuing threats to investment, so as to create maximum publicity for minimum share price impact on their own companies.

They have also been careful to put projects "on hold", rather than cancel them, again to minimise share market impact. They can always be taken "off hold" later when needed – as most think they will. As Professor Garnaut says, any project that is profitable before RSPT is profitable after. The opportunities from the mining boom are simply too big to ignore, even if the super profits are a little lower.

The Government won't be swayed by a political campaign from the miners. So I'd call on companies to engage properly in the consultation process. The RSPT is not going away, but generous transitional arrangements will be put in place, as we have said all along.

These last three weeks have seen a few very noisy companies, and many more very quiet ones. I've been very impressed, Mr Speaker, by the quiet, professional engagement of some companies with our Resource Tax Consultation Panel.

Now I don't think those companies like our RSPT any more than the noisy ones. But they accept the right of a Government to govern, and they accept our offer of consultation as genuine, and they are engaged with us in getting the implementation right.

Since our announcement of the policy, we have had more than 80 companies engaging with the Treasury consultation process. This is a serious commitment of time and effort by Government and business. We believe that it is important that all companies engage so that all views can be taken into account.

Stronger Economy

Mr Speaker, every business in Australia and every working family in every corner of Australia has a stake in sustainable and broad economic growth. Our tax package is expected to grow the economy by 0.7 per cent in the long run, boost investment by 2.1 per cent and reduce prices by 1.1 per cent.

I invite the House to compare this with the Opposition's policy to lift the company tax rate by 1.7 per cent. Our modelling shows this policy will reduce GDP by 0.2 per cent, reduce investment by 0.55 per cent and increase consumer prices by 0.25 per cent.

Mr Speaker, Australia has many significant economic advantages that can provide the foundation for growth and prosperity into the future, provided we get the policy settings right. This side has a pro-growth, pro-investment policy to leverage Australia's strengths, but that side does not.

Our substantial natural resources, strong growth in demand for our exports from countries in our neighbourhood, and the quality and resilience of our people – as demonstrated most recently during the global financial crisis – give us cause for confidence that Australia's best days lie ahead.

We are also confident that our reforms will maximise Australia's opportunities while also meeting the challenges posed by the ageing of our population and shifts in the global economy that will see the return of boom conditions in our mining sector.

We never expected this tax to be applauded by every company – domestic or foreign. But we do expect our reforms to build a broader, stronger economy for working families and that, after all, is what we're here for.

Thank you Mr Speaker.