Over the last week or so I have noticed a growing voice of concern over the mining industry and the Australian economy generally. This started with an article from Jessica Irvine which slanted an argument that Australian resources are sovereign wealth and therefore mining companies should be paying a larger proportion of their profits back to the Australian people:
Here’s something to keep in mind the next time you hear a mining magnate or chief executive complaining about an outrageous assault on their industry. Those minerals they’re mining – all that gold, iron ore, coal and uranium – it’s yours. You own it.
By virtue of your incredibly good fortune to have been born on, or migrated to, this particular rocky outcrop in the southern seas, you posses an equal claim to all the rich resources lying beneath. ”Australians all let us rejoice … our land abounds in nature’s gifts of beauty rich and rare.”
It was not always so clear cut. But around the turn of the 20th century, Australian state governments moved to take ownership of all the minerals under the earth, on behalf of all Australians. The old property law of ”for whoever owns the soil, it is theirs all the way up to heaven and down to hell” no longer applied
I have some sympathy for this argument. I do believe that mining companies are getting off lightly under the current taxation regime and I also agree that resources are the sovereign wealth of all Australians. However, I also think that there are far better ways that Australians can gain from large industries, such as mining, above that of simple taxation transfers back to the government sector.
That position however, is not the point I want to focus on today.
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What you may have noticed about Ms Irvine’s article is that she never actually addresses the issue as to why Australians aren’t already benefitting from the mining boom. Her entire article, although thought provoking, misses a major concern that I have with the Australian economy, something I have mentioned previously.
A couple of days after that article appeared in the national media Wayne Swan penned an economic note in which he also glossed over the major structural issues within the economy which has led to the failed wealth capture from the mining boom.
Australia walks tall in the global economy. Unlike virtually every other advanced economy, we didn’t fall into recession as a result of the global financial crisis. Our stimulus response kept the doors of businesses open and hundreds of thousands of workers in jobs. Today our economy has grown by 7.4 per cent on pre-GFC levels, putting us streets ahead of the seven major advanced economies. In fact, three of the seven haven’t yet recovered the ground they lost during the GFC.
Many people don’t realise that one of the lingering effects of the GFC has been a massive write-down of tax receipts – at MYEFO, government revenues were down by $140 billion over the five years to 2012-13 from the pre-GFC forecast. Since then we’ve seen further weakness in company tax receipts as highlighted in the National Accounts, which showed company profits down 2.7 per cent in the December quarter. This will inevitably flow through to the budget bottom line and obviously means we will have to find significant savings in the May Budget.
The Right strategy
Despite the tough global conditions, we remain determined to return the budget to surplus in 2012-13, and we will get there. It’s the right strategy for the economy, for confidence and for Australian jobs – particularly with growth on track to return to trend. You only have to look to events overseas to see why this is so important. Europe’s sovereign debt crisis is the result of governments failing to set out and stick to credible paths back to surplus. Maintaining our fiscal rigour is absolutely essential at a time when markets are punishing those without discipline. It sends a message of confidence to the world in uncertain times and also provides the Reserve Bank with maximum flexibility to respond to any further deterioration in the global economy.
The complexity of the task is increased because we can’t rely on the rivers of gold that flowed into government coffers during the last mining boom. As I’ve discussed before, we shouldn’t expect a repeat of the massive $334 billion upward revision to tax revenues that occurred between 2004 and 2007. Because of the much higher level of investment today, mining companies are able to claim much larger tax deductions. And unlike last decade, commodity prices are already at high levels so mining companies aren’t posting the same growth in profits that they once did. Australia’s terms of trade is forecast to gradually decline in the years ahead as increased global commodity production comes on line. All this means that government revenues will not grow at the sorts of rates we saw during the previous boom, and we’ll have to continue to find budget savings that balance fiscal discipline with fairness.
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As you may have noticed the entire focus is on mining and not once during that note did Mr Swan bother to mention what actually caused the the falling government revenues as noted in his own budget paper :
Total revenue has been revised down by $9.0 billion from parameter and other variations, largely reflecting downward revisions to company taxes, individuals income taxes and GST. Weaker company tax revenue reflects the more subdued economic conditions, owing in part to the recent natural disasters and lower than expected consumption expenditure. Lower capital gains and higher than anticipated accumulated losses accrued during the global financial crisis also play a role. Individuals’ income tax revenue is lower due to weaker capital gains and slower aggregate wage growth. Downward revisions in GST receipts reflect weaker than anticipated consumption expenditure.
The financial charts from that document clearly show that falling government revenues were due to overestimations of income, consumption and capital gains taxes.
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Then today came this article from Tim Colebatch in which he attempts to explain the underperformance of the economy in the context of the RBA’s monetary policy.
Australia’s economy is not doing as well as our ministers and senior officials like to boast. They keep telling us it is ”in a sweet spot”, displaying strong fundamentals, outperforming the world, we’ve heard it all. But the statistics show the real Australian economy is very different.
This time last year the Reserve Bank forecast that Australia’s GDP would grow by 4.25 per cent over 2011. Even after the Queensland floods it still forecast this, implying a growth rate of 6 per cent over the second half of the year. In the May budget, Treasury raised its growth forecast for the 2011-12 financial year to 4 per cent.
Last week the Bureau of Statistics reported that the economy actually grew 2.3 per cent in 2011. In the second half of 2011 it grew at 2.5 per cent. It has added just 10,000 jobs in a year. And, above all, a sharp divide has opened up between the mining states of the north and west and the everything-else economy of the south-east, where two-thirds of Australians live.
What went wrong?
Quite a few things. First, officials underestimated the strength of the headwinds created by the combination of a dollar at record highs and interest rates at relative highs. Outside mining-related areas, growth in 2011 was minimal, yet home mortgage rates are still at 2005-06 levels. Small business overdraft rates are at the levels of late 2007, when the Reserve was trying to slow down an overheated economy.
Mr Colebatch goes on to talk about the “mining investment boom” yet once again fails to actually mention the root cause:
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Aren’t there flow-ons from mining to the rest of the economy? Yes. Treasury deputy secretary David Gruen estimates ”the mining-related economy” – ”those parts of the domestic manufacturing, construction and service industries that directly contribute to mining production and investment” – has swollen from producing 4 per cent of GDP to 9 per cent.
Some of that is in the south-east. But the data is clear: the ”trickle down” to south-eastern Australia from the mining boom is a trickle. What the high dollar and high rates are doing is not.
But aren’t mining profits spent in Australia? When they fund more mining investment, yes. But there is less flow-on from mining dividends: 80 per cent of our mining shares are owned overseas, and most of the Australian shares are held by super funds whose job is to save, not spend.
And that touches on my major issue with all of this.
For some reason this country appears to be unable to have an adult conversation about what is actually happening in the economy. The government refuses to acknowledge the structural weaknesses, preferring to blame the mining sector, while the media stands by with flaccid analysis of the major issue.
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The major structural issue with the economy is that for the last two decades fiscal policy has been used to steer national income towards housing.
As the last year has proven, housing is an asset that requires ever expanding domestic private sector debt to maintain its value at current levels. In order to maintain that level of credit expansion the Australian banking system, and therefore the Australian economy, has had to continually borrow from the rest of the world while expanding its own balance sheet.
I believe this to be a fairly simple economic concept, yet for some reason this country’s financial and political elite appear to be unable to communicate it. Is this because.
a ) They simply don’t undertand how the economy actually works; or
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b ) By admitting that the private sector debt expansion has been the major driver of the economy for the last two decades, they believe they are admitting their own failure of economic management and oversight.
Personally I don’t care, because this is not a time for blame. The mining boom is a transitionary economic phase in which large amounts of foreign capital will circulate around the economy, mostly as higher incomes for mining exposed services, but ultimately will leave Australia because we still run large deficits with the rest of the world and our most profitable enterprise are only partly owned by locals.
This is not a time for our government and media to point exclusively at one sector of the economy and blame them for the problem. This is a structural issue that has been growing for many many years and a large proportion of the population, including the government, has profited from it.
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There is, however, a finite amount of time available to Australia to capture capital flows associate with the mining boom in order to redirect the Australian economy in a direction of sustainable wealth for our nation. My biggest concern is that I see absolutely no one addressing this most fundamental of issues.
So please, can we all sit down and have a full disclosure adult conversation about the structure of the Australian economy, including a future path to sustainability, while we still have the good fortune of being the envy of the rest of the world.
