Social and economic case for helping women work

Surely the most momentous social change of our times began sometime in the 1960s or '70s when parents decided their daughters were just as entitled to an education as their sons. Girls embraced this opportunity with such diligence that today they leave schools and universities better educated than boys.

Fine. But this has required much change to social and economic institutions, which we've found quite painful and is far from complete. It's changed the way marriages and families operate - changed even the demands made on grandparents - greatly increased public and private spending on education, led to the rise of new classes of education and childcare, changed professions and changed the workplace.

It has led to greater "assortative mating", where people are more likely to marry those not just of similar social background, but of a similar level of education.

For centuries the labour market was built around the needs of men. Changing it to accommodate the needs of the child-bearing sex has met much resistance, and we have a lot further to go. This is evident from last week's report of the Human Rights Commission, which found much evidence to show "discrimination towards pregnant employees and working parents remains a widespread and systemic issue which inhibits the full and equal participation of working parents, and in particular, women, in the labour force".

You can see this from a largely social perspective - accommodating the rising aspirations of women and ensuring they get equal treatment - or, as is the custom in this more materialist age, you can see it from an economic perspective.

By now we - the taxpayer, parents and the young women themselves - have made a hugely expensive investment in the education of women. It accounts for a little over half our annual investment in education.

If we fail to make it reasonably easy for women to use their education in the paid workforce, we'll waste a lot of that money. Our neglect will cause us to be a lot less prosperous than we could be.

Of late, economists are worried our material standard of living will rise more slowly than we're used to, partly because mineral export prices have fallen but also because, with the ageing of the baby boomers, a smaller proportion of the population will be working.

They see increased female participation in the labour force - more women with paid work, more working women with full-time jobs - as a big part of the answer to this looming catastrophe (not).

But how? One way would be to impose more requirements on employers, but in an era where the interests of business are paramount, politicians are reluctant to do that. Make employers provide childcare or paid parental leave? Unthinkable.

So, for the most part, taxpayers have picked up the tab. Government funding of childcare has reached about $7 billion a year, covering almost two-thirds of the total cost. The cost of government-provided paid parental leave is on top of that.

Governments' goals in childcare have evolved over time. In the '70s and '80s, the focus was on increasing the number of places provided. In the '90s, the focus shifted to improving the affordability of care, with the introduction of, first, the means-tested childcare benefit, and then the unmeans-tested childcare rebate. Under the Howard government, the rebate covered 30 per cent of net cost, but Labor increased it to 50 per cent.

More recently, increased evidence of the impact of the early years of a child's life on their future wellbeing has shifted governments' objectives towards child development and higher-quality, more educationally informed, childcare. This includes getting all children to attend pre-school. Linked with this has been a push to raise the pay of childcare workers.

The federal government asked the Productivity Commission to inquire into childcare and early childhood learning. Last week it produced a draft report. I suspect the pollies were hoping the commission would find a way to reduce regulation of what they kept calling the childcare "market"; thus improving workforce participation and "flexibility" while achieving "fiscal sustainability".

If so, they wouldn't have been pleased with the results. The main proposal was that the childcare benefit and rebate be combined into one, means-tested subsidy payment paid direct to childcare providers.

This would involve low-income families getting more help while high-income families get less. There would be a small additional cost to the government, but this could be covered by diverting money from Tony Abbott's proposed changes to paid parental leave. It was "unclear" his changes would bring significant additional benefits to the community.

The commission wasn't able to claim its proposals would do much to raise participation in the labour force, mainly because our system of means-testing benefits - which works well in keeping taxes low, something that seems to be this government's overriding goal - means women face almost prohibitively high effective tax rates as their incomes rise, particularly moving from part-time to full-time jobs.

Like the Henry tax review before it, the commission just threw up its hands at this problem. And even the commission couldn't bring itself to propose major reductions in the quality of education and care. Sorry, no easy answers on childcare.

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Compulsory super without protections is a rip off

A few weeks ago, when I offered my list of our top 10 economic reforms of the past 40 years, I was surprised by the number of people arguing I should have included compulsory employee superannuation in the list. Really? I can't agree.

It is, after all, merely a way of compelling people to save for their retirement. That's probably no bad thing in principle, countering our all too human tendency to worry excessively about the here and now and too little about adequate provision for our old age.

But compulsory saving hardly counts as a major reform. I suspect some of my correspondents see it as a boon for workers because it extracts a benefit from employers over and above the wages they're paid.

If so, they've been misled by appearances. Economists are in no doubt it all comes out in the wash: that when the government obliges employers to contribute to workers' retirement savings, the employers eventually make up for it by granting smaller wage rises than they otherwise would have.

It's true that compulsory super contributions - and the subsequent earnings on them - attract tax concessions, being taxed at a flat rate of just 15 cents in the dollar. But while upper income-earners do disgracefully well out of these concessions, people on incomes around the average gain little advantage, and those earning less than $37,000 a year gain nothing. Hardly sounds fair to me.

My other reservation about compulsory super is the way it compels employees to become the victims of the most shamelessly grasping, overpaid industry of them all: financial services. These are the people who made top executives and medical specialists feel they were underpaid.

Compulsory super delivers a huge captive market for the providers of investment services to make an easy living from and for the less scrupulous among them to prey upon. The pot of money the government compels us to give these people to manage on our behalf has now reached $1.6 trillion.

Most of us have little idea how much these people appropriate from our life savings each year to reward themselves for the services we're compelled to let them provide to us - and little desire to find out.

We should be less complacent. For many workers it's more than we pay for electricity each year. Think of it: we put so much energy and passion into carrying on about the rising price of power - and Tony Abbott used our resentment to get himself elected - while the men in flash suits dip into our savings without most of us knowing or caring.

To be fair, industry super funds dip into our savings far more sparingly than the profit-driven "retail" funds backed by the big banks, insurance companies and firms of actuaries. Since most workers do have a choice, you'd need a very good reason not to have your money with an industry fund.

But even this worries me. It means the union movement - the people whose job is to protect workers by being full bottle on the tricks the finance industry gets up to - has divided loyalties. Those who should be holding the industry to account are also part of it.

For years the industry campaigned for an increase in the super levy of 9 per cent of salary, arguing it was insufficient to provide people with an adequate income in retirement. This is a dubious argument, rejected by the Henry taxation review.

But look at it another way: here is a hugely profitable industry arguing the government should increase the proportion of all employees' wages diverted to the industry for it to take annual bites out of before giving us access to our money at age 60 or later.

This is classic rent-seeking. The Howard government was never tempted to yield, but as part of the Labor government's mining-tax reform package, it agreed to boost compulsory super contributions to 12 per cent by 2019. Why? I don't doubt Labor was got at by the union end of the financial services industry.

Contributions increased to 9.25 per cent last July, but the Abbott government came to power promising to defer the phase-up for two years. I'd lay a small bet this deferral will become permanent - though probably not before contributions rise to 9.5 per cent on July 1.

I wouldn't be sorry to see the phase-up abandoned. The Henry report recommended against it, arguing that action to reduce the industry's fees could produce a similar increase in ultimate super payouts. And it's doubtful that low income earners are better off being compelled to save rather than spend their meagre earnings.

The government's policy of compelling workers to hand so much of their wages over to the finance industry surely leaves the government with a greater-than-normal obligation to ensure the industry doesn't exploit this monopoly by misadvising and overcharging its often uninformed customers.

This - along with the millions lost by investors in Storm Financial and other dodgy outfits - prompted Labor's Future of Financial Advice reforms, which focused on prohibiting or highlighting hidden commissions and requiring advisers to put their clients' interests ahead of their own.

But now Senator Arthur Sinodinos is seeking to water down these consumer protections in the name of reducing "red tape". The financial fat cats live to rip us off another day.

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Mining tax message: no bipartisanship, no reform

WHEN governments stuff up in a democracy we think the solution is obvious: toss 'em out and give the other lot a go. But if you want a democracy that also delivers good government, it ain't that simple.

For too long, the private partisanship of those who want to see good economic policy lead to good economic outcomes has blinded us to an obvious truth: if you look back at the reform we've implemented, you find almost all of it happened because it had the support of both sides.

It's been too easily forgotten that all the potentially hugely controversial reforms of the Hawke-Keating government - deregulating the financial system, floating the dollar, phasing out protection and moving to enterprise bargaining - were supported by the Coalition.

Amazingly, the last big move to slash protection came during the depths of the recession of the early 1990s, when unemployment was on its way to 11 per cent. Dr John Hewson's big criticism was that Labor should have been bolder.

How did Labor have the courage to do such things? It's simple: it knew any adversely affected vested interests would get no sympathy from its political opponents.

Most Australians - even those who follow politics closely - don't realise how obsessed politicians are by the likely reaction of their opponents to anything they do; how much the policies of the opposition affect the policies of the government.

After Paul Keating failed to win his party's support for a broad-based consumption tax in 1985, he set his face against a goods and services tax. His scaremongering over Hewson's proposed GST was the main reason he won the unwinnable election of 1993.

After Keating's demise at the following election, the Labor opposition abandoned all bipartisanship on economic reform, running another scare campaign against John Howard's GST plan at the 1998 election and going close to defeating him.

This makes the GST the honourable exception to the rule: the only major economic reform we've seen survive without bipartisan support.

And it brings us to the mining tax. Let me be crystal clear about this: Labor has made an almighty hash of the minerals resource rent tax, revealing an abysmal level of political nous, moral courage and administrative competence.

It failed to release the Henry tax reform report for discussion well before announcing its decisions (thereby catching the miners unawares), failed to explain an utterly mystifying tax measure (and, before that, press Treasury to come up with something more intuitive).

It failed to stop the entire business community joining the miners' crusade against the tax, failed to counter the economic nonsense the miners peddled in their TV ad campaign, and failed to hold its own in the negotiations with the big three miners, allowing them to turn the tax into a policy dog's breakfast that, at least in its early years, would raise next to nothing.

In all this Kevin Rudd has to take much of the blame (for lacking the courage to release the Henry report early), Wayne Swan has to take much of the blame (for not putting Treasury through its paces and being so weak at explaining the tax) and Julia Gillard has to take much of the blame (for decapitating Rudd and then being so desperate to rush to an election she was prepared to agree to anything the miners demanded, without proper Treasury scrutiny).

After all that, Labor deserves no mercy. But the truth is Tony Abbott also played a part in lumbering the nation with a bad tax.

The case for requiring the miners to pay a higher price for their use of the public's mineral reserves at a time of exceptionally high world prices (even now) is strong.

Remembering the miners are largely foreign-owned, a well-designed tax on above-normal profits is a good way to ensure Australians are left with something to show for all the holes in the ground.

Similarly, the argument that a tax on "economic rent" (above-normal profit) is more efficient than royalty payments based on volume or price is strong, as is the argument that taxing economic rent should have no adverse effect on the level of mining activity. Relative to royalties, quite the reverse.

But Abbott cared about none of that. His response was utterly opportunistic. He would have opposed the tax whether it was good, bad or indifferent.

He saw an opportunity for a scare campaign and he took it, particularly when it became clear the big three miners were out to defeat the tax by bringing down the government and so would have bankrolled his election campaign.

It was fear of what Abbott would say that prompted Labor to delay the release of the Henry report until it could rule out most of its controversial recommendations.

It was the success of Abbott and the miners' joint campaign against the tax that, added to his loss of nerve on the emissions trading scheme, made Rudd vulnerable to his enemies within Labor.

And it was Abbott's strength in the polls that made Gillard so anxious to square away the miners at any cost and rush to an election while her (as it turned out, non-existent) honeymoon lasted.

But noting Abbott's share of the blame isn't the point. The lesson for people hoping for economic reform is that unless they're willing to use what influence they have to urge bipartisanship on their own side, they should expect precious few further advances.

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Tax reform lost in saga of expediency

Whether led by Kevin Rudd or Julia Gillard, this government has little sense of strategic direction. Everything it does is a response to the needs of the moment. Consider the chequered history of the Henry inquiry into tax reform, the final blow to which was delivered in the budget last month.

The inquiry had its genesis in one of the first of Rudd's silly ideas, the Twenty-20 summit. Bring a bunch of bright people together with a pile of butcher's paper and who knows what good ideas they could come up with?

The business people attending came up with the world's most predictable idea: what this country needs is more tax reform. What they really meant was that taxes should be changed so they paid less. When it comes to contributing to the public debate, our business people are nothing if not chancers.

But Rudd was desperate for something solid to "take forward" to prove the summit hadn't been a complete fiasco. His need, I suspect, became the Treasury secretary's opportunity. No one in this country knows more, or cares more, about tax reform than Dr Ken Henry. He's been part of all the considerable reform we've had since the mid-1980s.

Knowing his time as Treasury secretary would come to an end, he must have seen his chance to make a last big mark on the future. Of course, his idea of tax reform was quite a bit different from that fondly imagined by business.

The inquiry was ordered to report by Christmas 2009. Really? A report about a subject as contentious as tax reform - with all its winners and losers - set to lob not many months before the next election?

But apparently Labor had a plan. Its coffers were overflowing with proceeds from the resources boom. It could go into the next election promising sweeping tax reform and using all the surplus revenue to square away any losers. What's the problem?

Then the global financial crisis. It quickly emptied the government's coffers and left it spending big to stimulate the economy. Oh no! We've got this blasted tax report coming which will propose all these changes everyone will hate.

By the time Henry reported, Rudd was in a terminal funk over the Senate's rejection of his carbon pollution reduction scheme and the failure of the Copenhagen climate change summit. Rather than putting the tax report out for public discussion he delayed looking at it, pretending to be too busy visiting dozens of hospitals to discuss health reform with the nearest pretty nurse.

Then someone had a bright idea. Among Henry's hundred-plus proposals was one for some new-fangled tax on the miners' economic rents. We could rip a lot of brass off the miners, then use the proceeds to cherry-pick Henry's other proposals.

At no net cost to the budget we could take a tax reform package into the election. We'd spread the proceeds around a host of interest groups. They'd love it and we'd have a reform program only the miners didn't like. But there'd be little public sympathy for them.

We'd cut the company tax rate by a couple of points, give something nice to small business and, above all, get the union secretaries and superannuation industry off our back by covering the budgetary cost of increasing super contributions to 12 per cent.

But caught off guard by a new tax no one understood (and which would raise twice as much as the government imagined), the miners - led by BHP Billiton's Marius Kloppers - opted to campaign for the government's defeat. They ran TV ads assuring the mug punters the mining tax would cost 'em their jobs.

Rudd's losing fight with the miners, coming on top of his collapse in the polls when he walked away from "the great moral challenge of our time", cost him his job. Gillard decided to buy off the big three miners - BHP, Rio and Xstrata - at any price so she could rush to an election and capitalise on her imagined honeymoon with the voters. The deal she did replaced an incomprehensible mining tax with a dog's breakfast designed on the run by the big miners. It came at the expense of their pipsqueak contemporaries - including T. Forrest, G. Rinehart and C. Palmer - and big business generally, which had its cut in the company tax rate halved.

Time passes, Gillard's poll ratings are at rock bottom and we get to this year's budget. With all the whingeing about the cost of living it would be great to give the punters a bribe, but how could we afford it when we're moving heaven and earth to get the budget back to surplus?

Another bright idea. Since everyone's lost interest in tax reform, why not unpick the remnants of the tax-reform package and use the savings to "spread the benefits of the boom to families" with votes?

Why not can the cut in the company tax rate (our stocks with business couldn't go any lower), postpone the higher concessional super contributions cap and forget the new standard deduction and the discount on tax on interest income?

Instead of using the mining tax to cut taxes elsewhere, why not just use it to increase welfare spending? Tax reform is sooo yesterday.

But the one bloke you don't need to feel sorry for in this saga is Henry. He was never so naive as to expect a weak, hard-up government to buy a bundle of unpopular tax reforms on the eve of an election.

What he wanted was to leave his successors in Treasury and elsewhere with a detailed blueprint of the direction in which the tax system should head over coming decades. He got to leave his legacy.

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AN ECONOMIC MANAGEMENT UPDATE: TAX REFORM

Talk to Victorian Commercial Teachers Association
September 13, 2010

The survival of the Gillard government with the support of the various independents has breathed new life into the debate about tax reform and the recommendations of the Henry tax review. Ms Gillard has agreed with the two country independents to hold a tax summit before July next year to discuss the economic and social effects of the reforms proposed by the review. The Labor government’s survival also allows it to press on with its intention to enact the revised minerals resource rent tax and the package of measures it will pay for. All of the four members of the House whose votes the government needs have indicated their support for the mining tax in some form, as have the Greens, who will have the balance of power in the Senate after June next year. About $6 billion of the $10 billion regional assistance package negotiated with the independents will be funded from the proceeds of the mining tax, via the Regional Infrastructure Fund.

The Henry tax review

The tax package was produced as the government’s response to the Henry review panel’s comprehensive review of the Australian tax and transfer system, federal and state. It’s the first comprehensive review since the Asprey report of 1975. Just as the Asprey report set the direction for tax reform over the following 25 years, so Ken Henry’s goal was to lay down a blueprint to guide further reform over coming decades, whether by this government or its successors. Henry set out proposals to:

• concentrate federal and state revenue-raising on four broad-based taxes: personal income, business income, rents on natural resources and land, and private consumption. Other taxes should be retained only where they serve social purposes or internalise negative externalities (eg gambling, tobacco and alcohol taxes, petrol taxes, pollution taxes). State taxes on insurance, conveyancing and other stamp duties and payroll tax should be replaced by a comprehensive 1 pc land tax and a ’broad-based cash flow tax’ (a simplified GST-type tax). (The objection to payroll tax is not that it’s a tax on labour - so is the GST - but that its high threshold means only larger businesses are taxed.)

• change the mix of taxation to reduce reliance on taxing mobile resources (eg business income) and increase reliance on taxing immobile resources (eg land and resources, and consumption). The company tax rate should be reduced from 30 pc to 25 pc. State royalty charges on minerals should be replaced by a resource rent tax levied at 40 pc.

• introduce a new two-step income tax scale with a tax-free threshold of $25,000 (but with the low-income tax offset and other offsets abolished), a 35 pc rate to $180,000 (but the 1.5 pc Medicare levy abolished) and (the present) 45 pc rate above that.

• regularise the widely disparate rates of tax on income from savings by allowing a 40 pc discount on income from interest, rent and capital gains, but also on deductions for interest expense of rental properties.

• improve the targeting of cash transfer payments.

• reform the taxation of superannuation by abolishing the 15 pc tax on contributions. People’s contributions should be taxed at their marginal rate, but they should receive a tax offset designed to ensure low income earners pay no net tax on contributions, middle income earners pay no more than 15 pc and only high income earners pay more than 15 pc. This would greatly improve the present inequitable distribution of the super tax concession. The tax on fund earnings should be halved to 7.5 pc. These two measures would lead eventually to greater super payouts, particularly for low and middle earners, making a rise in the compulsory contribution rate unnecessary.

• improve the taxing of roads by introducing congestion pricing that varies by time of day, using the proceeds to replace the tax element of motor vehicle registrations and possibly fuel taxes. Heavy vehicles should pay changes reflecting the damage they do to roads.

• reduce the complexity of the tax system, including by using an optional standard deduction for work-related expenses to simplify the completion of tax returns and save on tax agents’ fees.

Contents of the original tax package

A week before the 2010 budget was announced, the Rudd government unveiled the tax reform package that was its response to the Henry review and also the centrepiece of its budget. The package consisted of one big new tax, originally called the resource super-profits tax, which would cover the cost of various tax cuts and increased tax concessions. The mining tax effectively replaced the states’ various royalty charges for the use of minerals owned by the Crown. Although the states would continue to charge these royalties, miners would have their payments refunded by the feds. The resource tax was originally expected to raise a net $12 billion in its first two years of operation.

Proceeds from the resource tax would finance a range of tax reductions:

• Company tax rate phased down from 30 pc to 28 pc

• Small business to receive company tax rate cut earlier than other companies, plus instant write-off of new fixed assets worth less than $5000

• The present tax deduction for resource exploration costs to be turned into a ‘refundable tax offset’ at the prevailing company tax rate, making it more valuable to explorers and much more expensive to the government

• The concessional treatment of superannuation made more concessional in several ways, including: the 15 pc contributions tax for people earning up to $37,000 a year is effectively eliminated and the higher cap on contributions by people over 50 will be continued permanently for those with inadequate super. The package would also cover the cost to revenue of the decision to slowly phase up the compulsory contribution rate for employees from 9 pc to 12 pc between 2013 and 2019. (The cost to revenue arises because wages that formerly would have been taxed at the employee’s marginal rate will now be taxed at the 15 pc rate of the contributions tax. The legal incidence of the increased contributions falls on the employer, but economists believe it is shifted to the employee by means of wage rises that are lower than otherwise.)

• Tax on interest income to be subject to a 50 pc discount (similar to the tax on capital gains) up to a limit of $1000 interest income.

• As a step towards simplifying tax returns, rather than itemising their work-related expenses (and tax agent’s fees), people may opt to claim a standard deduction of $500, to be raised to $1000.

As well as these tax measures, the government announced that part of the proceeds from the resource tax will be contributed to a ‘regional infrastructure fund’ and distributed to the states, particularly the resource-rich states, to finance resource-related infrastructure.
Timing: the resource tax isn’t due to begin for more than two years - July 2012 - and so all the other parts of the package are begun or phased in from that date.

The original package as tax reform

The Rudd government’s response to the Henry tax review was surprisingly limited. Of the review’s 138 recommendations, the government accepted and acted upon just a couple, explicitly rejected 19 politically controversial proposals and failed to comment on the rest. In other words, it cherry-picked the report, selecting just a few things it thought would bring short-term electoral benefit.

The report contained many politically difficult recommendations but one that was particularly attractive: a proposal to introduce a whole new source of revenue by using a federal resource rent tax to replace the states’ mineral royalty charges. Here the government had some highly respected economists urging it to introduce a lucrative new tax on an unpopular, mainly foreign-owned industry and assuring it the tax would do nothing to discourage mining or hurt the economy.

It could use the new tax to pay for various politically attractive ‘reforms’, to be introduced after it was re-elected. The resource rent tax it announced was in line with Henry’s recommendations, except for a spin-doctor-inspired name change to the ‘resource super-profits tax’. The tax was opposed by the Opposition and bitterly resisted by the mining companies, which won a fair bit of sympathy from wider business community. This resistance caused many voters to wonder whether the tax would be bad for the economy, but almost all the criticisms were unjustified. Precisely so as to ensure the tax didn’t do the bad things it was accused of, it was hugely complex, meaning that many of its critics simply didn’t understand how it would work.

When you look at the other supposed reforms, however, you find they bear little resemblance to the Henry report’s recommendations:

• It did propose a cut in the company tax rate, but to 25 pc not 28 pc.

• It did propose the instant write-off of assets, but for those costing less than $10,000 not $5000.

• On superannuation, the report proposed that the cost of increasing the concession on contributions by lower income earners be covered by reducing the concession to higher income earners. The government did the nice bit but not the nasty bit. The government did nothing about halving the tax on fund earnings as recommended. The report specifically avoided recommending an increase in the rate of compulsory contributions, but we got on anyway.

• The report recommended a thorough overhaul of the tax on savings, with the 50 pc discount on capital gains cut to 40 pc and the 40 pc discount extended to interest income and the interest expense deductions on rental property. The government introduced a 50 pc discount for interest income, but with a cap of $1000 in interest income. It made no changes to the capital gains discount or to negative gearing.

• The introduction of a standard deduction for work-related expenses was in line with the report’s proposals (though it may have been more generous that the report had in mind) and the report said nothing about introducing a new infrastructure fund.

The package as amended by Julia Gillard

The original resource tax drew considerable opposition from the mining industry, which reduced the Rudd government’s standing in the opinion polls and contributed to Kevin Rudd’s removal by his party and replacement by his deputy, Julia Gillard. Within a week of her taking the top job - and just two months after its announcement - the resource super profits tax was extensively modified after negotiations with the three biggest mining companies and renamed the minerals resource rent tax. The coverage of the tax was reduced to just those firms mining coal and iron ore. Even those firms are excluded if their liability would be less than $50 million a year. The rate of the tax was reduced from 40 pc to a nominal 30 pc, but an effective 22.5 pc. The guaranteed rebate of 40 pc of losses was replaced with a higher cut-in point for the rent tax: the long-term government bond rate plus 7 percentage points. Whereas under the original arrangement all firms were given an automatic rebate of the state royalty payments, under the revised arrangement they will merely receive a deduction against their liability for the resource rent tax, meaning if they pay no rent tax they receive no relief from royalty payments. Various other changes were made and the existing 40 pc petroleum resource rent tax was extended to cover all offshore and onshore oil, gas and coal-seam gas projects.

The government originally expected to raise a net $12 billion over the first two year of the super profits tax but, as Mr Swan revealed when announcing the revised tax, later realised it would have raised ‘about double’ this amount (mainly because Treasury had greatly underestimated the expected production volumes of the three big mining companies). This explains why, despite the near-halving of the rate of the tax and other concessions, the proceeds from the tax are expected to fall by only $1.5 billion to $10.5 billion. This loss of revenue was covered by abandoning the plan to turn the tax deduction for exploration costs into a refundable rebate and by limiting the cut in the rate of company tax to 1 percentage point, not 2.

The economic rationale for the new resource rent tax

The present state government royalties - which aren’t so much taxes as charges for the use of mineral resources belonging to the community - are quite inefficient because they are based either on quantity (a price per tonne) or on a certain percentage of the market price. This means they take no account of the cost of mining the mineral, which varies from site to site and may increase as the exploitation of a particular site moves from the easily extracted to the hard-to-extract. Thus the present royalties can have the effect of making a prospective site uneconomic and discouraging the full exploitation of a site. This inflexibility limits the ability of state governments to raise the rate of the royalty when world commodity prices are high. (They may also be inhibited by perceived competition between the states or unduly close relations with the mining companies.)

The beauty of the new tax (and the existing petroleum resource rent tax) is that, because they are based on taking a share of super-normal profits, they don’t discourage the exploitation of marginal sites, nor encourage the under-exploitation of existing sites. They are highly flexible, taking higher royalties when world commodity prices are high, but automatically reducing the take when world prices fall. There will be times when world prices fall to the point where some sites are paying no royalty-equivalent (the resource tax) and there will be some sites with high production costs that never have to pay royalties.

Super-normal profits are profits received in excess of those needed to keep the capital employed within the business rather than leaving in search of more profitable opportunities. So super-normal profit represents ‘economic rent’ - any amount you receive in excess of the amount needed to keep you doing what you’re doing, your opportunity cost. Accountants and economists calculate profit differently. Accountants take revenue, subtract operating costs and regard the remainder as profit. But economists also subtract normal profit - the minimum acceptable rate of return on the capital invested in the business - which they regard as an additional cost, the cost of capital. The appropriate rate of return must be ‘risk-adjusted’ ie the higher the risk of the business operating at a loss, the higher the rate of return above the risk-free rate of return, usually taken to be the long-term government bond rate.

(This is what’s so silly about the mistaken claim that the original resource tax regarded any profit in excess of the bond rate as super profit. The risk was taken into account not by adding a margin to the bond rate [as occurs with the petroleum resource rent tax] but directly, by having the government, in effect, bear 40 pc of the cost of the project, including losses.)

Most taxes on an economic activity have the effect of discouraging that activity. This is clear in the case of the existing royalty charges. But resource rent taxes are carefully designed to have minimal effect on the taxed activity. Because the return on capital remains above its opportunity cost, activity should not be discouraged, meaning there should not be any adverse effect on employment or economic growth. Indeed, because of the more favourable treatment of marginal projects, there should be more employment and growth.

Economic theory says a resource rent tax should not add to the prices being charged by the taxed firms because it does nothing to add to their costs (as opposed to the effect on their after-tax profits) and because the firm is already charging as much as the market will bear. In practice, it may not be charging as much as it could. So a better argument is that our mining companies are price-takers on the international market, with Australian producers’ share of the world market not big enough to have much effect on the world price.

The fact that resource rent taxes have been explicitly designed not to do all the bad things the vested interests accuse them of doing explains the strong support for such taxes from economists. The resource rent tax is actually the proud invention of Australian economists, available to be copied by other countries.

The package as short-term macro management

The tax package is roughly revenue neutral over the next four financial years. It can be thought of as detachable - should the mining tax not be passed by the Senate, none of the measures it finances would go ahead, thus leaving the budget little affected.

This means it’s wrong to imagine the resource tax would play a significant part in returning the budget to surplus. The budget is projected to reach (negligible) surplus in 2012-13 for three reasons:

• the effect on the budget’s automatic stabilisers of the economy’s expected return to strong growth

• the always-planned completion of the government’s temporary stimulus measures

• the government’s adherence to its ‘deficit exit strategy’ of allowing the level of tax receipts to recover naturally as the economy improves (ie avoid further tax cuts) and holding the real growth in spending to 2 pc a year until a surplus of 1 pc of GDP has been achieved.

The fact that the government now expects the return to surplus to occur three years’ earlier than it expected in last year’s budget is explained by the much milder recession than it expected and the much stronger forecasts for the next four years. Various factors caused the recession to be so mild, including the V-shaped recovery in China and the rest of developing Asia, and the consequent bounce-back in coal and iron ore prices.

In view of the government’s commitment to limiting the real growth in its spending to 2 pc, it’s worth noting that virtually all the things on which it intends to ‘spend’ the proceeds from the resource tax are tax cuts and tax concessions. That is, the package has been structured so as to add little to the government’s difficultly in meeting its 2 pc target. The qualification to this is the plan to put about $700 million a year into the new state infrastructure fund. My guess is that contributions to the fund have been designed to be the ‘swing instrument’ - that is, to be reduced or even eliminated should collections from the resource tax fall short of projections.

The package as long-term macro management

Because the resource tax is designed to be heavily influenced by the ups and down in world commodity prices, receipts from it are likely to be highly variable over the years. By contrast, the cost to revenue of the tax cuts and concessions it finances is likely to be far less variable. For an accountant-type, as Peter Costello appeared to be, this would be a worry. The tax package will make the budget balance much more cyclical. For an economist, however, this is a virtue: by introducing the resource tax the government has added a new and powerful automatic stabiliser to its budgetary armoury.

Because Australia is such a major producer of mineral commodities, the cycle in world commodity prices is likely to align pretty closely with our business cycle. Whenever we’re in a resources boom, close to full capacity and with the Reserve Bank worried about inflation pressure, the resource tax will take more revenue from the boom sector and send it to the budget. Provided this extra revenue isn’t spent or used to repeatedly cut income tax (as it was in John Howard’s day) it will act as a drag on the economy, reducing inflation pressure and hence the need for higher interest rates. Whenever we’re in a resources bust, the economy has turned down and unemployment is rising, resource tax collections will collapse, the budget will go more quickly and more deeply into deficit and this will be the automatic stabilisers working to help prop up the private sector and put a floor under the downturn.

The tax package can be seen as an attempt to improve the economic managers’ ability to manage the economy during resources booms: to chop the top off them and make them less inflationary, but also to ensure we have more to show from them when they’ve passed. The contributions to the state infrastructure fund are a way of requiring the miners to contribute more towards their own additional infrastructure requirements.

More significantly, the linking of the minerals tax with an increase in compulsory superannuation contributions should ensure at least some of the income from the boom is saved rather than spent. Empirical evidence suggests the introduction of compulsory super has done more to increase national saving than conventional analysis led us to expect. (The practical weakness in the argument is that the super increase is being phased in so slowly - the first tiny increase takes place in July 2013 and the last in July 2019 - the boom could be long past its peak by then.)

Ceteris paribus, an increase in national saving will cause our current account deficit and foreign liabilities to be lower than otherwise - always remembering that the resumed resources boom is expected to cause the CAD to be high for a protracted period. The small cut in company tax may make Australia more attractive as a destination for foreign investment, particularly equity investment. Combined with the higher national saving and potential for interest rates to be less high than otherwise (less weight on monetary policy), it’s possible to see this leading to a lower exchange rate than otherwise.

The economic effects of Julia Gillard’s changes to the mining tax

When the government finally realised its tax would extract about twice as much from the miners as it had expected to, it should simply have halved the rate of the tax from 40 to 20 per cent. This would have left all the efficiency benefits and macro stabilisation benefits of the tax intact. Instead, the government almost halved the effective rate of the tax (from 40 to 22.5 per cent) but also butchered the tax, thus reducing - though not eliminating - its economic benefits.

Originally, the tax involved a complete, up-front rebate of state royalties; now all a firm gets is a deduction against any mining tax it pays. Originally, the tax applied to all minerals; now it applies only to coal and iron ore, with an exemption for those firms owing less than $50 million in mining tax. So whereas originally the whole of the mining industry would have benefited by being released from the state royalty system, now all non-coal and iron ore miners and many small coal and iron ore projects will stay subject to the inefficient, activity-discouraging royalty system. Originally, 40 per cent of losses were guaranteed by the government. Now 7 percentage points have been added to the bond-rate ‘uplift factor’. This arbitrarily leaves some projects better off, but some worse off.

It was always the case that virtually all the new tax was to have been paid by the big three companies; in some years, MORE than all. In other words, excluding the other minerals and the coal and iron-ore tiddlers may actually have saved the government revenue. Many projects would have been permanently relieved from paying royalties while only sometimes having to pay resource rent tax. If so, those other firms are worse off under the changes. They would remain subject to all the drawbacks of the state royalty system. And fewer mining projects are likely to be started because their potential promoters will find the prospect of early losses more daunting.

When the mining tax involved a 40 per cent take from profitable mining projects, but a 40 per cent rebate for unprofitable projects, this made the proceeds from the tax highly cyclical. They would shoot up when world commodity prices were high, but collapse when resource prices were low. In those years, the government might be paying out almost as much on unprofitable projects as it was receiving from profitable projects. So the replacement of the 40 per cent rebate on losses with a higher uplift factor reduces the extent to which the new tax would act as one of the budget’s automatic stabilisers.

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Miners moan, but we need our fair share

It's easy to forget that the future of the minerals resource rent tax - the most significant tax reform since the goods and services tax was introduced a decade ago - hangs on the outcome of this election.

Should Tony Abbott win, he won't proceed with introducing the mining tax in July 2012, meaning he won't proceed with most of the tax concessions the new tax would pay for.

Labor has justified the tax as necessary to give Australians a fairer share of the profits from mining the now hugely more valuable coal and iron ore deposits the community owns. Exploitation of these resources is subject to royalty charges levied by state governments, but these payments have failed to keep up with the resources' higher market value.

Against this, the Liberals have claimed this "great big new tax" would do great damage to the mining industry and hence the economy. The big three mining companies - BHP Billiton, Rio Tinto and Xstrata - initially agreed with this claim, but dropped their objections after the incoming Julia Gillard did a deal with them that significantly watered down the original "resource super profits tax".

However, the smaller coal and iron ore mining companies - which weren't part of the deal - now believe (correctly) they were dudded by the big boys and have continued their opposition, claiming the tax means "families will be hurt with job losses in every community across Australia".

It's not hard to see why miners would object to paying more tax, but the tax was recommended by the Henry tax review and it is hard to see why these eminent economists would advocate a tax that could damage the economy.

The very reason for levying a tax on the "economic rent" derived from mining (that is, on the "super-normal profit" earned in excess of the "normal profit" needed to keep the mining companies' resources employed in the mining business) is to ensure the tax does not discourage mining activity.

Indeed, the review argued that, as well as raising revenue that could be used to reduce other, less efficient taxes, the resource rent tax would tax the resources sector more efficiently. That is, over time it would lead to a bigger mining industry, not a smaller one.

As originally proposed, the tax had three main advantages in terms of encouraging the efficient allocation of resources. First, using an increase in the tax on immobile resources (such as minerals) to finance a reduction in the tax on internationally mobile resources (such as financial capital, via company tax) would improve Australia's ability to compete against other countries in attracting foreign investment.

Second, using the tax to effectively replace state royalties would do much less to discourage mining activity. Royalty payments are inefficient because they're levied either on the volume of minerals mined or on their market price. This means royalties take no account of the cost of mining the minerals, which varies with the quality of the mineral being mined and how hard it is to get at.

The effect is to discourage the mining of low-grade deposits and discourage miners from continuing to mine the more costly, deeper-down minerals once the less costly stuff near the top has been won.

Third, the royalty system does nothing to recognise the high risks involved in setting up a mine. You can spend a lot of money, then discover it isn't profitable after all. The royalty system ignores all your costs, but starts charging you from the first tonne you manage to produce.

The great (but much misunderstood) beauty of the original resource super profits tax was it went as close as it practically could to the symmetrical treatment of profits and losses. You'd pay 40 per cent tax on your net profits, but if you incurred a net loss the government would cover 40 per cent of it. If you couldn't immediately deduct the 40 per cent from other mining tax payable, you could carry it forward, with its real value preserved by indexation to the long-term bond rate. If you abandoned the mine as unprofitable, the taxman would refund 40 per cent of your indexed accumulated loss.

Many critics of the tax got terribly muddled over this unfamiliar arrangement, accusing the government of using the (risk-free) long-term bond rate to measure the economic rent, when everyone knew you should use the risk-adjusted rate of return.

They failed to see it was the government guarantee of 40 per cent of losses that took account of risk. This recognition of risk meant fewer firms would be discouraged from undertaking risky investments by the tax system's failure to make adequate allowance for those risks.

So, as originally designed, the mining tax was highly efficient in its effect on the allocation of resources. Trouble was, it would have raised more than double the revenue Treasury originally estimated. That was the real thing bugging the big three companies.

Gillard should have responded merely by halving the rate of the tax from 40 per cent to 20 per cent. Instead, she cut it to an effective 22.5 per cent and butchered its design for good measure. In the process, she greatly reduced - but didn't eliminate - its efficiency benefits.

Originally, the tax involved a complete, up-front rebate of state royalties; now all you'd get is a deduction against any mining tax you owe. Originally, the tax applied to all minerals; now it applies only to coal and iron ore, with an exemption for those firms owing less than $50 million in mining tax. Originally, 40 per cent of losses were guaranteed by the government; now 7 percentage points have been added to the bond-rate "uplift factor" (which arbitrarily leaves some projects better off and some worse off).

It was always the case that virtually all the new tax was to have been paid by the big three companies; in some years, more than all. In other words, excluding the other minerals and the coal and iron-ore tiddlers may actually have saved the government revenue. If so, those other firms are worse off under the changes. They'd remain subject to all the drawbacks of the state royalty system. And fewer mining projects are likely to be started because their potential promoters will find the prospect of early losses more daunting.

Even so, a butchered mining tax would be better than no mining tax.

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THE RUDD GOVERNMENT’S MINI TAX PACKAGE

Economics and Business Educators annual conference, Bankstown, Friday, May 28, 2010

This talk has been billed as an update on fiscal and monetary policies, but now I’ve seen the budget I want to focus in on just one development, the most interesting aspect of the budget, the Rudd government’s tax reform package - its mini reform package. This year the budget was announced in stages and the government’s response to the report of the Henry tax review was unveiled a bit more than a week before the budget - though some elements of the response were announced in the budget itself. Either way, it’s now clear that the tax package was main measure in the budget.

Contents of the package

The package consists of one big new tax, the resource super-profits tax, which will cover the cost of various tax cuts and increased tax concessions. The resource tax effectively replaces the states’ various royalty charges for the use of minerals owned by the Crown. Although the states will continue to charge these royalties, miners will have their payments refunded by the feds. The resource tax is expected to raise a net $9 billion in its first full year of operation.

Proceeds from the resource tax will finance a range of tax reductions:

• Company tax rate phased down from 30 pc to 28 pc

• Small business receives company tax rate cut earlier than other companies, plus instant write-off of new fixed assets worth less than $5000

• The present tax deduction for resource exploration costs will be turned into a ‘refundable tax offset’ at the prevailing company tax rate, making it more valuable to explorers and much more expensive to the government

• The concessional treatment of superannuation is made more concessional in several ways, including: the 15 pc contributions tax for people earning up to $37,000 a year is effectively eliminated and the higher cap on contributions by people over 50 will be continued permanently for those with inadequate super. The package will also cover the cost to revenue of the decision to slowly phase up the compulsory contribution rate for employees from 9 pc to 12 pc between 2013 and 2019. (The cost to revenue arises because wages that formerly would have been taxed at the employee’s marginal rate will now be taxed at the 15 pc rate of the contributions tax. The legal incidence of the increased contributions falls on the employer, but economists believe it is shifted to the employee by means of wage rises that are lower than otherwise.)

• Tax on interest income will be subject to a 50 pc discount (similar to the tax on capital gains) up to a limit of $1000 interest income.

• As a step towards simplifying tax returns, rather than itemising their work-related expenses (and tax agent’s fees), people may opt to claim a standard deduction of $500, to be raised to $1000.

As well as these tax measures, the government announced that part of the proceeds from the resource tax will be contributed to a ‘resource state infrastructure fund’ and distributed to the states, particularly the resource-rich states, to finance resource-related infrastructure. This measure, combined with the resource exploration rebate, is supposed to account for ‘approximately one third’ of the proceeds of the resource tax. In the first full year, however, they’re expected to make up less than half that.

Timing: the resource tax isn’t due to begin for more than two years - July 2012 - and so all the other parts of the package are begun or phased in from that date.

The Henry tax review

The tax package was produced as the government’s response to the Henry review panel’s comprehensive review of the Australian tax and transfer system, federal and state. It’s the first comprehensive review since the Asprey report of 1975. Just as the Asprey report set the direction for tax reform over the following 25 years, so Ken Henry’s goal was to lay down a blueprint to guide further reform over coming decades, whether by this government or its successors. Henry set out proposals to:

• concentrate federal and state revenue-raising on four broad-based taxes: personal income, business income, rents on natural resources and land, and private consumption. Other taxes should be retained only where they serve social purposes or internalise negative externalities (eg gambling, tobacco and alcohol taxes, petrol taxes, pollution taxes). State taxes on insurance, conveyancing and other stamp duties and payroll tax should be replaced by a comprehensive 1 pc land tax and a ’broad-based cash flow tax’ (a simplified GST-type tax). (The objection to payroll tax is not that it’s a tax on labour - so is the GST - but that its high threshold means only larger businesses are taxed.)

• change the mix of taxation to reduce reliance on taxing mobile resources (eg business income) and increase reliance on taxing immobile resources (eg land and resources, and consumption). The company tax rate should be reduced from 30 pc to 25 pc. State royalty charges on minerals should be replaced by a resource rent tax levied at 40 pc.

• introduce a new two-step income tax scale with a tax-free threshold of $25,000 (but with the low-income tax offset and other offsets abolished), a 35 pc rate to $180,000 (but the 1.5 pc Medicare levy abolished) and (the present) 45 pc rate above that.

• regularise the widely disparate rates of tax on income from savings by allowing a 40 pc discount on income from interest, rent and capital gains, but also on deductions for interest expense of rental properties.

• improve the targeting of cash transfer payments.

• reform the taxation of superannuation by abolishing the 15 pc tax on contributions. People’s contributions should be taxed at their marginal rate, but they should receive a tax offset designed to ensure low income earners pay no net tax on contributions, middle income earners pay no more than 15 pc and only high income earners pay more than 15 pc. This would greatly improve the present inequitable distribution of the super tax concession. The tax on fund earnings should be halved to 7.5 pc. These two measures would lead eventually to greater super payouts, particularly for low and middle earners, making a rise in the compulsory contribution rate unnecessary.

• improve the taxing of roads by introducing congestion pricing that varies by time of day, using the proceeds to replace the tax element of motor vehicle registrations and possibly fuel taxes. Heavy vehicles should pay changes reflecting the damage they do to roads.

• reduce the complexity of the tax system, including by using an optional standard deduction for work-related expenses to simplify the completion of tax returns and save on tax agents’ fees.

The package as tax reform

The Rudd government’s response to the Henry tax review was surprisingly limited. Of the review’s 138 recommendations, the government accepted and acted upon just a couple, explicitly rejected 19 politically controversial proposals and failed to comment on the rest. In other words, it cherry-picked the report, selecting just a few things it thought would bring short-term electoral benefit.

The report contained many politically difficult recommendations but one that was particularly attractive: a proposal to introduce a whole new source of revenue by using a federal resource rent tax to replace the states’ mineral royalty charges. Here the government had some highly respected economists urging it to introduce a lucrative new tax on an unpopular, mainly foreign-owned industry and assuring it the tax would do nothing to discourage mining or hurt the economy.

It could use the new tax to pay for various politically attractive ‘reforms’, to be introduced after it was re-elected. The resource rent tax it announced was in line with Henry’s recommendations, except for a spin-doctor-inspired name change to the ‘resource super-profits tax’. The tax is being opposed by the Opposition and bitterly resisted by the big mining companies, which have won a fair bit of sympathy from wider business community. This resistance has caused many voters to wonder whether the tax would be bad for the economy, but almost all the criticisms are unjustified. Precisely so as to ensure the tax doesn’t do the bad things it is being accused of, it is hugely complex, meaning that many of its critics simply don’t understand how it would work.

When you look at the other supposed reforms, however, you find they bear little resemblance to the Henry report’s recommendations:

• It did propose a cut in the company tax rate, but to 25 pc not 28 pc.

• It did propose the instant write-off of assets, but for those costing less than $10,000 not $5000.

• On superannuation, the report proposed that the cost of increasing the concession on contributions by lower income earners be covered by reducing the concession to higher income earners. The government did the nice bit but not the nasty bit. The government did nothing about halving the tax on fund earnings as recommended. The report specifically avoided recommending an increase in the rate of compulsory contributions, but we got on anyway.

• The report recommended a thorough overhaul of the tax on savings, with the 50 pc discount on capital gains cut to 40 pc and the 40 pc discount extended to interest income and the interest expense deductions on rental property. The government introduced a 50 pc discount for interest income, but with a cap of $1000 in interest income. It made no changes to the capital gains discount or to negative gearing.

• The introduction of a standard deduction for work-related expenses was in line with the report’s proposals (though it may have been more generous that the report had in mind) and the report said nothing about introducing a new infrastructure fund.

The economic rationale for the resource super-profits tax

The present state government royalties - which aren’t so much taxes as charges for the use of mineral resources belonging to the community - are quite inefficient because they are based either on quantity (a price per tonne) or on a certain percentage of the market price. This means they take no account of the cost of mining the mineral, which varies from site to site and may increase as the exploitation of a particular site moves from the easily extracted to the hard-to-extract. Thus the present royalties can have the effect of making a prospective site uneconomic and discouraging the full exploitation of a site. This inflexibility limits the ability of state governments to raise the rate of the royalty when world commodity prices are high. (They may also be inhibited by perceived competition between the states or unduly close relations with the mining companies.)

The beauty of the super-profits tax (and the existing petroleum resource rent tax) is that, because they are based on taking a share of super-normal profits, they don’t discourage the exploitation of marginal sites, nor encourage the under-exploitation of existing sites. They are highly flexible, taking higher royalties when world commodity prices are high, but automatically reducing the take when world prices fall. There will be times when world prices fall to the point where some sites are paying no royalty-equivalent (the resource tax) and there will be some sites with high production costs that never have to pay royalties.

Super-normal profits are profits received in excess of those needed to keep the capital employed within the business rather than leaving in search of more profitable opportunities. So super-normal profit represents ‘economic rent’ - any amount you receive in excess of the amount needed to keep you doing what you’re doing, your opportunity cost. Accountants and economists calculate profit differently. Accountants take revenue, subtract operating costs and regard the remainder as profit. But economists also subtract normal profit - the minimum acceptable rate of return on the capital invested in the business - which they regard as an additional cost, the cost of capital. The appropriate rate of return must be ‘risk-adjusted’ ie the higher the risk of the business operating at a loss, the higher the rate of return above the risk-free rate of return, usually taken to be the long-term government bond rate.

(This is what’s so silly about the mistaken claim that the resource tax regards any profit in excess of the bond rate as super profit. The risk is taken into account not by adding a margin to the bond rate [as occurs with the petroleum resource rent tax] but directly, by having the government, in effect, bear 40 pc of the cost of the project, including losses.)

Most taxes on an economic activity have the effect of discouraging that activity. This is clear in the case of the existing royalty charges. But resource rent taxes (including the resource super-profits tax) have been carefully designed to have minimal effect on the taxed activity. Because the return on capital remains above its opportunity cost, activity should not be discouraged, meaning there should not be any adverse effect on employment or economic growth. Indeed, because of the more favourable treatment of marginal projects, there should be more employment and growth.

Economic theory says a resource rent tax should not add to the prices being charged by the taxed firms because it does nothing to add to their costs (as opposed to the effect on their after-tax profits) and because the firm is already charging as much as the market will bear. In practice, it may not be charging as much as it could. So a better argument is that our mining companies are price-takers on the international market, with Australian producers’ share of the world market not big enough to have much effect on the world price.

The fact that resource rent taxes have been explicitly designed not to do all the bad things the vested interests accuse them of doing explains the strong support for such taxes from economists. The resource rent tax is actually the proud invention of Australian economists, available to be copied by other countries.

The package as short-term macro management

The tax package is roughly revenue neutral over the next four financial years. It can be thought of as detachable - should the resource tax not be passed by the Senate, none of the measures it finances would go ahead, thus leaving the budget little affected.

This means it’s wrong to imagine the resource tax would play a significant part in returning the budget to surplus. The budget is projected to reach (negligible) surplus in 2012-13 for three reasons:

• the effect on the budget’s automatic stabilisers of the economy’s expected return to strong growth

• the always-planned completion of the government’s temporary stimulus measures

• the government’s adherence to its ‘deficit exit strategy’ of allowing the level of tax receipts to recover naturally as the economy improves (ie avoid further tax cuts) and holding the real growth in spending to 2 pc a year until a surplus of 1 pc of GDP has been achieved.

The fact that the government now expects the return to surplus to occur three years’ earlier than it expected in last year’s budget is explained by the much milder recession than it expected and the much stronger forecasts for the next four years. Various factors caused the recession to be so mild, including the V-shaped recovery in China and the rest of developing Asia, and the consequent bounce-back in coal and iron ore prices.

In view of the government’s commitment to limiting the real growth in its spending to 2 pc, it’s worth noting that virtually all the things on which it intends to ‘spend’ the proceeds from the resource tax are tax cuts and tax concessions. That is, the package has been structured so as to add little to the government’s difficultly in meeting its 2 pc target. The qualification to this is the plan to put about $700 million a year into the new state infrastructure fund. My guess is that contributions to the fund have been designed to be the ‘swing instrument’ - that is, to be reduced or even eliminated should collections from the resource tax fall short of projections.

The package as long-term macro management

Because the resource tax is designed to be heavily influenced by the ups and down in world commodity prices, receipts from it are likely to be highly variable over the years. By contrast, the cost to revenue of the tax cuts and concessions it finances is likely to be far less variable. For an accountant-type, as Peter Costello appeared to be, this would be a worry. The tax package will make the budget balance much more cyclical. For an economist, however, this is a virtue: by introducing the resource tax the government has added a new and powerful automatic stabiliser to its budgetary armoury.

Because Australia is such a major producer of mineral commodities, the cycle in world commodity prices is likely to align pretty closely with our business cycle. Whenever we’re in a resources boom, close to full capacity and with the Reserve Bank worried about inflation pressure, the resource tax will take more revenue from the boom sector and send it to the budget. Provided this extra revenue isn’t spent or used to repeatedly cut income tax (as it was in John Howard’s day) it will act as a drag on the economy, reducing inflation pressure and hence the need for higher interest rates. Whenever we’re in a resources bust, the economy has turned down and unemployment is rising, resource tax collections will collapse, the budget will go more quickly and more deeply into deficit and this will be the automatic stabilisers working to help prop up the private sector and put a floor under the downturn.

The tax package can be seen as an attempt to improve the economic managers’ ability to manage the economy during resources booms: to chop the top off them and make them less inflationary, but also to ensure we have more to show from them when they’ve passed. The contributions to the state infrastructure fund are a way of requiring the miners to contribute more towards their own additional infrastructure requirements.

More significantly, the linking of the resource tax with an increase in compulsory superannuation contributions should ensure at least some of the income from the boom is saved rather than spent. Empirical evidence suggests the introduction of compulsory super has done more to increase national saving than conventional analysis led us to expect. (The practical weakness in the argument is that the super increase is being phased in so slowly - the first tiny increase takes place in July 2013 and the last in July 2019 - the boom could be long past its peak by then.)

Ceteris paribus, an increase in national saving will cause our current account deficit and foreign liabilities to be lower than otherwise - always remembering that the resumed resources boom is expected to cause the CAD to be high for a protracted period. The small cut in company tax may make Australia more attractive as a destination for foreign investment, particularly equity investment. Combined with the higher national saving and potential for interest rates to be less high than otherwise (less weight on monetary policy), it’s possible to see this leading to a lower exchange rate than otherwise.

THE RUDD GOVERNMENT’S MINI TAX REFORM PACKAGE

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