16 September 2011

We should be economically rational about mining

Apart from the irony of Rudd’s later attack on the miners as foreign companies sending their profits overseas, the Prime Minister’s defence of foreign students went to the heart of the economic, political and philosophical challenge of a mining boom creating a classic two-speed economy.

That is, a commodity boom in Western Australia and Queensland makes it difficult for other sectors, such as education services depending on foreign students, in the economic slow lane in NSW and Victoria.

This is the wider argument the government and opposition have to address as Australia faces the mining boom mark II and tries to get long-term value out of selling non-renewable resources, spread the advantages of such a boom and not kill the emerging recovery.

The thrust of the super profits tax arising from the Henry review is to ensure there is a fair share of tax paid from non-renewable resources, to redistribute some of the wealth to the rest of the nation, to direct spending to ports, rail and roads to avoid export bottlenecks and to encourage the growth of smaller mining companies.

This new tax has become a symbol in the political and economic argument of whether you slow the fast lane of the two-speed economy to allow the slower lane to catch up or speed up the slow lane.

Within the government circle of advice and decision-making, there are clearly differences that are inviting divisions and creating confusion, not least for the mining industry. Miners are complaining they were not consulted on the changes, the threshold for a super profit is too low at the long-term bond rate of about 6 per cent and the 40 per cent rate is so high it will kill projects and deter investment.

The government response, based on the Treasury advice, is that the new tax arrangements will help the mining sector to expand and offer an underwriting from taxpayers for smaller, marginal mining projects.

The miners are arguing a predisposition to slow the fast lane is bad for the economy. Labor frontbencher Craig Emerson, who advised Bob Hawke on the creation of the petroleum resources rent tax, has made it clear he agrees it’s bad policy for a government to intervene to pick winners or hobble efficient industries.

Before the release of the Henry review, the Small Business Minister told a Perth audience it would be scandalous to slow a booming industry sector to try to help the manufacturing or services sector.

“I am a passionate advocate of the service economy, but I am not so naive as to fall for the fallacy that since mining contributes only 7 per cent of gross domestic product and service industries 66 per cent, mining is dispensable and the future lies wholly in services,” Emerson said in Perth.

“Any proper economic analysis would confirm that Australia’s mining and energy resources sector utilises a vast array of services, including financial services, engineering, construction, transport and communications. Take out the mining and energy resources sector and you take out much of the service economy with it, plunging Australia into a deep recession with soaring unemployment,” the minister said.

Reserve Bank of Australia deputy governor Ric Battellino voiced similar thoughts before Emerson in Sydney, when he said: “The general pattern is that a lot of people talk about two-speed economies, but through mining booms it’s usually the case that all parts of the Australian economy benefit. Some benefit more than others, so you have very fast and fast. They’re the two speeds.”

Reported comments from Battellino at a closed dinner suggest he also thinks that a slowing of mining investment would help prevent the economy overheating and take pressure off interest rates.

Certainly, Treasury secretary Ken Henry signalled his concern about the effect of the resources boom on other industry sectors and parts of Australia through skill shortages and wages before his resources super profits tax, a deliberately different tax from the PRRT, was unveiled.

“Standard economic theory tells us that if the terms of trade remain at high levels, not only will the resources sector command more capital and labour, manufacturing and other industries whose relative output prices are declining will command less, even as our total stock of capital expands,” he said in Brisbane last October.

“Furthermore, as the factors of production are reallocated, the pattern of growth will be characteristic of what is often referred to as a two-speed economy; and real wages growth and labour productivity growth will be weak, possibly even negative. There may be tax policy responses that can both support higher labour productivity and real wages and, coincidentally, ameliorate the extent of the structural adjustment associated with the resources boom,” Henry said.

Rudd echoed the views, saying: “A growing resources sector will draw capital and workers to the mining states, increasing pressure on other industries and regions as they compete for employees and investment . . . Unless we recognise these challenges, Australia risks becoming a two-speed economy as the resources sector absorbs more capital and labour, while manufacturing and other industries suffer a relative decline in competitiveness.”

At the moment the fight over the design of the RSPT is diverting the focus on this wider issue of national importance but it has to be addressed rationally and practically by both sides of politics.

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