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Monday, 24 May 2010
Page: 3719

Ms LEY (4:48 PM) —The government has just handed down its third budget. I remind the House that since coming to power, and under cover of the global financial crisis, the government has taken us from $22 billion in surplus to a deficit this year, 2009-10, of $57.1 billion. In the process, it has spent 60 per cent of the capital in three savings funds that were created by the previous government for national investment: the building fund, the health fund and the education fund.

I was in the coalition government party room when then Treasurer Peter Costello announced that these funds would not be spent, that they would be used for investment and that the interest from these funds would be available as and when required. It is devastating to imagine that 60 per cent has already been spent. Next year the deficit is tipped to be $40.8 billion and the budget is expected to return to surplus in 2012-13. We do not believe that it will.

The opposition’s response to the budget finds two overarching problems. The first is that the two arms of policy, fiscal and monetary, are moving in opposite directions. Lazy and unrestrained fiscal policy means that monetary policy alone is controlling the economy. This budget reveals that stimulus spending will continue until 2014, four years after the end of the global financial crisis. That is what I mean by lazy fiscal policy. But, meanwhile, on monetary policy, there have been six interest rate rises in a row. That is the first problem with this budget and this government’s economic management.

The second problem is its resource superprofits tax, which we find so abhorrent that we have centred our budget response around our determination to do all we can to make sure that this tax does not see the light of day. The government has described Australia as simultaneously suffering from the fallout of the global financial crisis—why else would we be continuing to spend the stimulus dollars, 40 per cent of which remained unspent only three months ago?—and being in the midst of a resources boom courtesy of our most globally competitive industry, mining. It is a boom that is apparently so problematic that it requires a superprofits tax to bring it back to earth.

What is the government’s response to this apparent inconsistency? They have talked about our two-speed economy due to the demand from China for our mineral resources from Western Australia, Queensland and offshore. I have actually never accepted this two-speed economy argument. I was pleased to see a paper by Deloitte released last week titled Clouds in the silver lining? The two speed economy and Dutch disease, which provides the analysis to debunk this argument. It is recommended reading and it states:

Australia does not have a ‘two-speed economy’; it has thousands of industries operating at different speeds, with price and resource adjustments taking place constantly.

If states like New South Wales where the drivers of economic growth are the commercial property market and South Australia where the drivers of growth are public infrastructure projects and defence shipbuilding are falling behind, why is it the fault of states like Western Australia and Queensland where industries are booming? It is just not that simple.

Take my electorate in the Murray Valley of New South Wales, where a town called Deniliquin is struggling with low water allocations, a savage drought and a declining in many of the activities which have made that town strong. In Deniliquin there is a small airline which is chartered regularly to Roxby Downs in South Australia, taking individuals who work in mining. The effect on Deniliquin is quite substantial. It is reasonable to say that the income from that fly-in fly-out charter is keeping some parts of the town of Deniliquin stronger than they otherwise would be. That is an example of why this is just not a straightforward exercise about an economy in one state performing in one way and an economy in another state performing in another.

The government is running some crazy lines. They go like this: ‘Resources are more of a curse than a blessing; manufacturing and the services industries are falling behind; it’s not the fault of debt-laden state governments who have failed to re-invest in their infrastructure; it must be the fault of the mining industry. How dare it pull so far ahead of the rest of us!’

Mr Swan was in Adelaide last week talking about—in the new jargon—‘mining boom mark II’ and remarked that, ‘The revenues from the resources superprofits tax will be invested in growing the economy—ensuring Australians benefit from the exploitation of non-renewable resources long into the future.’ As an aside it appears we are being re-educated to replace the term ‘mining’ with ‘exploitation of non-renewable resources’. The real problem I have with this statement is that it is the private sector, not governments, who should be making decisions about investment. For Mr Swan to talk about investments from the resources superprofits tax somehow growing the economy better than the private sector would is just plain ridiculous.

I also note the Treasurer said that, ‘A high degree of flexibility within the workforce here in SA has helped avoid massive lay-offs and skills destruction.’ I remind the Treasurer that there is one year to go before Julia Gillard’s new workplace laws come fully into operation. I wonder if the same flexibility, which the Treasurer was remarking on and praising in Adelaide, will exist then?

In the context of the resources boom, the Treasurer and other government ministers like to mention Dutch disease and raise the spectre of us having fallen victim to it. The Dutch disease theory is this: an increase in revenues from natural resources will de-industrialise a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive. It gets its name from the decline in the manufacturing sector in the Netherlands after the discovery of a large natural gas field. In fact it is difficult to prove the relationship between an increase in natural resource revenues, the real exchange rate and a decline in another sector of the economy that is lagging—that is right; it is very difficult to prove. There are a number of different things that could be causing the appreciation of the exchange rate. There are so many factors at play and every economy is different.

So in the Netherlands, which gave Dutch disease its name, economists have since argued that the decline in the Dutch manufacturing industry sector was actually caused by unsustainable spending on social services. Nigeria is also often quoted as a victim of Dutch disease. In fact the abundance of natural resources in that country gave rise to governments that were less accountable to the people, had little incentive for institution building and failed to implement growth-enhancing reforms, and so higher corruption, more rent-seeking activity and greater civil conflict resulted.

As economists have studied Dutch disease, they have found that to the extent it really exists at all, the manufacturing sectors with the highest capital intensity are less affected by windfall shocks and a diverse manufacturing sector is the key to being cushioned from resource shocks. We do have a high level of capital investment, the policy responses about a diverse manufacturing sector are there and this government has no right not to be acting on them.

The present government used to lecture us about house prices going up and how that showed we were mismanaging the economy. I used to think it’s not a bad problem to have if you own the house. It’s a lot better than the house price going down. The mining boom is a good problem to have, but every boom is followed by a bust. Our previous 150 years of history tell us exactly this. I cannot believe that our Prime Minister really thinks China will sustain a never-ending commodity boom—and he has, in fact, pocketed the proceeds already.

You cannot escape the fact that to levy a tax at 40 per cent and then make miners pay 28 per cent is a double tax whammy which singles this industry out for punishment like no other. The effective tax rate post supertax would be 58 per cent and if companies had a heavier level of debt, for which there is no compensation as the tax is currently designed, their effective tax rate could be as high as 70 per cent. I am taking into account the credits along the way and the fact that the supertax would be a deduction for company tax. Our tax system contains many complicated mechanisms to avoid the same income being taxed twice—dividend imputation, credits for withholding tax, separation of superannuation balances and so on. What really offends me about the resource superprofits tax is the double taxation aspect.

The government claims that the tax will result in a 4.5 per cent increase in investment, a seven per cent increase in employment and a 5.5 per cent increase in output from the sector in the long term. They will not show us the modelling but we know it was based on the assumption that resources are location specific and therefore investment will continue to flow. This is illogical, as we all know that capital transfers freely around the globe. There are no shortages of resources around the world and capital can just as easily leave our shores. So much of the government’s answers to our questions on this new mining tax centre around economic modelling. When has a Treasury model ever realistically demonstrated what will happen in the real world? It gives indications, it gives input and it gives suggestions, but for a government to rely on an economic computer based model to determine a policy as wide-ranging as this is an insult. I can recall when the Murray-Darling Basin Commission developed a model for environmental flows in the River Murray. It was sung from the rooftops by environmentalists at the time as demonstrating that, ‘We have to return flows to the Murray. It is absolutely essential.’ From there the Living Murray Initiative kicked off and unfortunately for those who believe, as I do, that too much water is being allocated to the environment, there have been devastating effects on communities.

I raise that, important though it is to my electorate, to mention that the model upon which the original analysis was based was inexact, because there was not enough scientific data about what happened with water flows, stream health and catchment health. There were 23 indicators of catchment health. They were not all built into the model. They built an assumption into the model that the river health would improve if you added more water, so of course there are no prizes for guessing what the model then predicted. If this model in Treasury is so good then the government should release the modelling. If they are basing their policy upon it too, if it is the rationale, then they should release the modelling.

Madam Deputy Speaker Moylan, I do not have it with me, but I could show you a table—and I will ask listeners to imagine this table—showing the top 15 countries in the world ranked by the volume of their reserves. Australia is one of the 15. Russia has more reserves of iron ore than we do, Guinea has more bauxite, Chile has more copper, China has more zinc, South Africa has more gold and Canada has more potash. We have the most nickel. Another table that I could show you would show the top 20 richest nations ranked by the value of their resources. South Africa and Russia are first and second, respectively. Australia is third. Then there are Canada, Brazil, China, Chile, USA, Ukraine and Peru, followed by 10 more. So as you can see, most metals have a very good geographic spread. If capital is taxed too heavily in Australia, it will move elsewhere.

I was insulted by the government’s dismissal of mining companies as repatriating profits overseas. They are an easy target, according to the government, because they are not really Australian. I was insulted. It is true that investment in Australian mining has more than doubled in the past decade. Approximately $150 billion of offshore funds have been invested to help extract Australian natural resources, much more than our own government has invested over this period. We do of course have a simple choice: either we use the savings of Australians or we use the savings of foreigners, and the savings of Australians are not there to the extent required for this investment.

The town of Broken Hill in the west of my electorate has a fly-in fly-out operation to Olympic Dam. We have heard reports that that project is on hold. The investment required there alone would be $20 billion. Clearly, we need investment from overseas in order to realise these projects. That is a good thing and not something that our Prime Minister should be whispering about behind his hand as something that we should be ashamed of. The Prime Minister should not be suggesting that our mining industry is tainted by its overseas ownership. That is outrageous.

At the very moment that he was doing this, my opposite number, Assistant Treasurer Nick Sherry, was in the Middle East selling Australia as a global financial hub for Islamic finance products! He has been spruiking changes to the managed investment trust regime in Australia to make Australia a more attractive destination for offshore funds, because of the stability of our financial services industry. I agree with all of that, but isn’t it a little bit hypocritical of the Prime Minister, at the same time, to be rubbishing those who would seek to put overseas dollars in investments in Australia?

It is generally estimated that over 75 per cent of all cash generated by mining companies is invested back ‘in country’. Shareholders have received 25 per cent of the company’s cash through dividends. So 75 per cent is reinvested back into projects or other projects, and 25 per cent is in dividends. That is what should be regarded as a fair share.

According to Philip Lowe, Assistant Governor of the Reserve Bank in Australia, the main task is to expand the supply side of the economy so that demand can grow solidly without causing inflation to rise. It is a much better problem to have than the other way around. The key to improving the supply side of the economy is investment and productivity growth. We have become a high-investment country in recent times because of the resources sector, which has quickened the increase in our capital stock. Investment in Australia is high because of high returns on capital, particularly in the resources sector.

This is not going to continue if Mr Rudd’s super tax gets up. Mr Rudd believes that revenue from the resources boom is needed to invest in the nation’s long-term human capital. With respect, this is a meaningless statement. As economists know, capital is the material means of production, and labour is labour. What raises living standards is sustained economic growth, a rise in the ratio of capital to labour. When that ratio improves, the value of labour’s marginal product and therefore wage rates increase. That creates the prosperity that the government says it wants to secure and that we say is under threat from the resources tax. Remember, a dollar of tax is a dollar not invested.

The real problem that we should all have with the proposed mining tax is the way that the issue has been handled. The mining companies put their submissions into the Henry review process and were not consulted further. The government allowed some strategic leaks so that everyone sort of knew it was coming. The announcement on 3 May followed, but not the detail. A consultation panel has been formed so that affected mining companies can tell the government and Treasury officials how to make their tax actually work.

You can imagine the opening line of the consultation process going like this, ‘We want to tax you so that we get $9 billion a year. We want the rate to be 40 per cent and everything above a six per cent cost of capital to be called a super profit. You tell us how to do it.’ I am not surprised at the response from the mining companies. And it was all so unnecessary. All Treasury officials and government ministers had to do was to pick up the phone during the period of the Henry review process and talk. But, because the Henry review was so politicised, it took two years. It arrived with the government at Christmas time last year and was sat on for four months—so that we now have the problem that we do. Just think of what would have happened had the review being released at Christmas. People could have talked about it. Mining companies could have stepped forward and said, ‘Before the budget, when you make these announcements, we have got some ideas for you.’ But no—the Prime Minister, so intent on micromanaging every stage of the process, had to be just a little bit too cute, and the problems that he now faces are entirely of his own making.

Meanwhile, a multibillion dollar industry is supposed to enter a holding pattern and wait and see. From opposition there is one certainty we can offer the resources sector: we will vote against the tax in opposition and we will rescind it in government. I do not accept that the government believes its own lines on the resources tax. It is imposing the tax because it needs the cash.

In the budget announcement, Wayne Swan referred to the lowering of personal income tax rates on 1 July. These were the tax reductions they voted against while in opposition and finally, through gritted teeth, agreed to just before the last election. The Treasurer is now spruiking these tax cuts as contributing to 85,000 more jobs. I do not necessarily disagree, but remember the Treasurer’s statement that the resources tax will contribute to a seven per cent increase in employment. So the question is: if a tax cut is good for the economy, why is a tax increase such as the resources tax just as good for the economy?

As policymakers what we should be doing is reducing the infrastructure bottlenecks to encourage more investment in our mining sector. The government’s response? A new infrastructure fund, initially paying $700 million to the states. This is not a savings fund; this is a slush fund. I have covered the opposition’s two main issues with the government’s budget. We urge them to rethink the mining tax. The shadow Treasurer has proposed $46.7 billion in opposition cuts in response. (Time expired)