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31 January
Comments Off on Resource price cycle taking Swan for a ride

Resource price cycle taking Swan for a ride

Federal budget 2013: Full coverageMichael Gordon: Hedging wedgingAdele Ferguson: Politics not economicsTim Colebatch: More pain than gainPeter Hartcher: Labor to leave with some dignityRoss Gittins: Labor chooses brave way out
Nanjing Night Net

There has certainly been revenue erosion. According to the latest budget papers, since the mid-year economic statement alone, events beyond the government’s control have reduced tax by an estimated $61 billion over the four years to 2015-2016. The expected company tax take is $24.3 billion lower.

Government decisions including the Medicare levy top-up ($11.4 billion) and business tax loophole closures ($4.1 billion) are predicted to boost receipts by $25.5 billion over four years, and the government is also lowering its spending by $18.3 billion.

Total revenue in 2014-2015 of $411.6 billion will, however, still be $17.2 billion or 4 per cent lower than it was expected to be in the May 2012 Budget. Tax revenue will be $12.7 billion lower.

Most people thought last year’s budget was overly optimistic in its forecasts. I wrote at the time that it had more rubber in it than Gumby. But not everyone could see a shortfall of this magnitude looming. One of the themes of the resources boom that peaked at the end of 2011 was that Australia had entered a commodity price super-cycle, where prices and Australia’s terms of trade would stay “stronger for longer” as Asia continued to industrialise and create a new consumer class.

The current downturn is only a chapter in the longer story. Commodity prices are the tell-tale: iron ore and coal are about 35 per cent below their boom-time peaks and all metals are below their highs, but the Reserve Bank’s commodity price index is still three times higher than a decade ago.

However, Labor is also off the mark when it blames the budget deficit blow-out on external factors alone. One of the supposed culprits, the Australian dollar, has done pretty much what was expected. Last year’s budget anticipated an average exchange rate of $US1.03, and the mid-year statement predicted $US1.02: the one-year average was in fact $US1.03.

What Treasury and the government did not predict, however was what the continuing strength of the Aussie would do to the non-resources economy. It pushed up export prices, pulled down import prices, sent already cautious consumers overseas and backed the government into a corner. It was committed to spend money that was not going to show up.

The cuts outlined in the budget reduce spending growth from 2.2 per cent in 2013-2014 to 1.2 per cent by 2015-2016. Spending as a percentage of GDP falls, and the cuts combine with revenue-raising measures to deliver a wafer-thin surplus by 2015-2016 and a slightly larger one (0.6 per cent of GDP) the following year.

Labor’s tactical call that heavier surgery would be dangerous at this stage is supported by the ratings agencies. They see no threat to Australia’s triple A credit rating, as long as Australia charts a medium-term path back to surpluses

It makes this budget feel that much less permanent though – one delivered by a government that is likely to be replaced in a little over four months, with a mini-budget from the new government likely in December.

Budget aficionados will recall 1996, when the newly-elected Howard government delivered its first Budget. Peter Costello declared that the deficit was out of control and handed down a crushing plan to cut outlays by 0.5 per cent in the first year, and by 2.1 per cent in year two. Without a serious tax increase (the GST is the ideal vehicle but for some reason is sacred) it would take cuts of similar magnitude to quickly push the budget back on a path of sustained, sizeable surpluses. Whether an Abbott government would have the desire and bottle to do this is unclear.

Business was the loudest lobby for the budget to set some sort of course towards surpluses, so there should be only muted groans on news that rumoured corporate tax crackdowns have been delivered. Anxiety will be further eased by the fact that offshore groups cop the brunt of the changes.

Thin capitalisation rules that limit tax deductions on debt raised by foreign-owned entities have been toughened to raise $1.5 billion over four years. Loopholes in company consolidation rules that have enabled companies to “double dip” deductions will be closed to drag in $540 million, and immediate full tax deductibility for the acquisition of mining rights and associated exploration will be replaced by a 15 year depreciation regime.

The exploration tax change rakes in $1.1 billion over four years and adds weight to the resources sector at a time when lower prices are already a drag on activity.

Government sources say, however, that there has been a growing trend in the resources sector, as the boom matures, for companies to claim write-offs on the acquisition of “exploration” rights that are in fact ownership shuffles involving resources that are well defined, moving towards production, and priced accordingly. Such deals have killed the goose.

This story Administrator ready to work first appeared on Nanjing Night Net.

 
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