Tag Archives: RSPT

Barnaby: The Economic Illuminati

9 Jun

Opinion piece for The Punch – Senator Barnaby Joyce, 7 June 2010:

The Mining Tax:  Treasury’s Own Love Formula

Every now and then, a select group from the economic illuminati retire to their monastic study and devise a splendid idea to try and pay off their previous splendid idea.

Splendid idea number one was to borrow so much money that we put ourselves in more strife than the early settlers in our desire to adorn the nation with an eclectic mix of rubbish that apparently was going to save us from Asia ceasing to purchase our minerals. The relationship between our stimulus and mineral exports was as clear as mud, but there was an emphatic defence of this fantastic proposition by Labor.

The Treasury corruption of the graphs depicting the relationship between our and other nations’ fiscal stimulus packages and the effect on their respective economies shows that when the graphs were corrected the relationship was hardly apparent. We really were sold a lemon on Labor’s “go hard, go early, go household strategy” in response to the North American and European financial crisis and are currently lumbered with in excess of $144 billion gross federal debt while on our merry way to in excess of $220 billion gross federal debt.

The next chapter in the Labor Party Magnus Opus was called “massive debt” and the next problem for Treasury was “how do we pay it off?” The Labor Party thought to increase their revenue stream in the most politically parochial way. They explained to Australia that the big miners are morally lacking, are exploiting the workers, and they as a government, Robin Hood – like, would restore the balance of fiscal morality. It would mean the partial nationalisation of our whole mining sector, however. They had it on good advice from the Secretary of the Treasury, that he had studied a theorem at high school that no matter how you flog this mining sector, it’s going to hang around and continue to support you.

The sobering reality is this, despite the Secretary of the Treasury stating that you can put taxes up in the mining sector and not affect the investment profile, he is wrong on this occasion. If taxes go up at an exponential rate to where they formerly were, people will make the logical decision to go where the taxes are less. If the Secretary of the Treasury tells you that a new tax will assist in cooling the planet, you really have to ask yourself if this is necessarily so. If you surround yourself with hedges of economic theorems and carpets of policy papers and spend your nights fanatically trying to turn human emotion into predictable mathematical models, and don’t recognise what is yelled to you as common sense by the peak industry groups, you will come unstuck when you find that your models don’t match their experience.

During Estimates one can get quite frustrated with well meaning pontificating by well paid bureaucrats about a perfect world they have created and what happens in it. This world has created a Newtonian expectation of preciseness to economics as required to match government policy desires. It supposes that gravity and economics are the same and that people’s actions are as predictable as other items of physics- like a mathematical model for love. Commonsense expectations on actions and reactions are put aside for superb anodyne reflections on economic issues. The basic premise that must be first applied when analysing the RSPT is this – if a miner can make more money in another venue, then to that other venue they will go. Unfortunately it appears that this statement of the bleeding obvious, that one cannot predict the economic speed of sound, has meant that a realistic gut instinct of what happens when you put a 40% tax on mining has not been followed.

The reality of the RSPT, which was blatantly obvious to virtually everyone, has now of course come to be in the actions of such companies as Xstrata in the reduction of their investment decisions in Australia. How can we believe the Labor Party’s lauding of their so-called management of the GFC and take for granted their endorsement that it was their school halls program that saved us from a recession, when it is the same Labor Government inspired brains trust that is creating this stuff up?

Dr Henry, in answer to my question at the Economics References Committee Inquiry earlier this week, stated that it didn’t matter whether the RSPT tax was at 40, 60 or 70 percent, as to how it would affect investment in Australia. I was left no choice but to believe that he was correct in his description of a theory but had completely departed from reality as to what was actually going to happen.

This new tax will not only be a bombshell to such mining areas as Gladstone, Townsville, Wollongong Newcastle and Mackay and the whole of WA, but ultimately it will affect those other big coastal towns such as Brisbane, Melbourne and Sydney as they come to the startling reality that these Labor Party splendid ideas are going to have dire consequences to the investment and export structure of our nation.

In the town of Wandoan, there are some farmers who are happy today due to the fact that a major mine is not going ahead and yes we should not be mining prime agricultural land because this is the ultimate non renewable resource. This Labor Party package was not to protect prime agricultural land but to prop up Treasury with a new tax. In fact the Labor Party hoped the mining would go ahead in Wandoan. However, there are some other families who were hoping that the income from the mine will increase their standard of living, and they are very unhappy, because Labor Party hopes are not their reality.

There were people who were going to build a $1 billion railway line from Wandoan to Banana and they are unhappy today as they are not going to build it anymore. There was supposed to be the development of a massive income stream to support lots of shops, chemists, school teachers, nurses, contractors, metal fabricators, diesel fitters and they are all going to miss out. They are all very unhappy. They are all unhappy because some group of individuals in Canberra decided that they were beyond questioning and resolute in a desire to inflict on the Australian economy what would have to be the most incongruous economic policy since the 1949 desire by the Labor government to nationalise the banking industry.

Joyce: ‘More Modelling Than Naomi Campbell’

3 Jun

Barnaby Joyce accuses Labor of using dodgy statistics in its propaganda for its Orwellian-named “Resource Super-Profits Tax” (RSPT).

From The Australian:

The Federal Government has more modelling “than Naomi Campbell” on its proposed mining tax, but none of it makes any sense, Nationals Senate leader Barnaby Joyce says.

He has accused the Government of hiding behind questionable statistics in its push to implement a 40 per cent tax on the super profits of mining companies.

They’ve got more modelling than Naomi Campbell, but it’s all wrong,” Senator Joyce said today.

Indeed, the modelling is all wrong.

Professor Steve Keen, winner of the Revere Award for being the international economist who first and most cogently forewarned of the coming GFC, has demonstrated that Treasury’s modelling is based on economic fallacies and “a gaping hole in logic“, in a series of articles for Business Spectator.  They can also be found on Professor Keen’s DebtWatch blog.

Returning to Barnaby:

He took special aim at Treasury over pie charts Treasurer Wayne Swan used to back the Government’s argument miners have been paying half the tax they were paying a decade ago.

Respected business commentator and ABC TV’s Finance presenter, Alan Kohler, today checked the numbers for himself in a column for Business Spectator titled, “The Government’s RSPT Spin Is A Disgrace”:

Another big accounting firm, Deloittes, has gone through ATO data and demonstrated that the effective tax rate for Australian mining companies (company tax plus royalties) is 41.3 per cent, compared with the average across all sectors of 27.18 per cent. I went into the ATO website and did the same calculation: it’s true.

In one of its taxpayer-funded advertisements, the government says: “Before the last boom Australia got 1 in every 3 dollars of mining profits in royalties and resource charges, we now receive just 1 in every 7 dollars.”

This statement is a disgrace, even leaving aside the fact that we are paying for it.

Back to Barnaby:

Senator Joyce wants to see the figures Treasury used to formulate the charts, but Departmental officials have opted to stall at a series of Senate estimates hearings this week.

“The pie charts don’t make any sense,” he said.

“They’ve had four days to explain two pie charts and they can’t do it.”

Indeed, according to mining magnate Andrew ‘Twiggy’ Forrest today, the head of the Treasury department Ken Henry – the architect of the now infamous Henry Tax Review – can’t even explain it himself:

Mr Forrest said Dr Henry had effectively conceded at a lunch with leading economists late last month that he was uncertain how financiers would view the rebate.

“When asked … he (Dr Henry) said, `I’m sure some clever banker is going to find out how to make it work’,” Mr Forrest said.

What he’s saying to the Australian people is that he doesn’t know.

“Ken Henry doesn’t have the answers and what I know with absolute certainty is that he didn’t consult with the banking industry, like he didn’t consult with the mining industry.

As this blog has highlighted many times, Treasury secretary Ken Henry is not fit to hold his position, and should be sacked.  The huge controversy over the RSPT only serves to confirm this view.

Yesterday Andrew Forrest revealed details of his own private conversations with Ken Henry over the RSPT, during which Henry admitted that the “logic” of his RSPT all rests on one critical assumption.  The fact that this assumption is dead wrong, further proves Henry’s ivory-towered, disconnected-from-economic-reality incompetence:

“Ken has described to me how the tax works and it relies on a critical assumption, that the so-called guarantee of 40 per cent of losses in bankruptcy actually has a value to financiers,” Mr Forrest told ABC Radio.

“If it doesn’t, then in Ken Henry’s own words, the logic of the entire tax collapses and this is just a 40 per cent take, which of course will then damage the industry.”

Mr Forrest said he had told Mr Henry that the 40 per cent tax credit guarantee on losses would be worthless to the mining industry as it would not be worth anything to financiers when they decided on loans.

“It theoretically works for economists in textbooks, it doesn’t work in the real world.”

Which is exactly what contrarian economist Steve Keen says is true about almost all mainstream economic thought, in his brilliant book Debunking Economics.

UPDATE:

From The Australian:

One of Australia’s most respected economic forecasters, Chris Richardson, has demolished the intellectual and economic modelling behind the government’s resource super-profits tax, effectively telling Treasury it got it badly wrong..

The assault on the fundamental logic of the tax will seriously embarrass the government and the architect of the tax, Treasury secretary Ken Henry, given their repeated claims that their model will not deter investment and the mining industry is merely running a fear campaign.

Mining Tax Puts Australia On Frontline of Market Fury

21 May

Highly respected Australian economics commentator, Robert Gottliebsen, puts forward the same basic point as investment giant Goldman Sachs/JB Were in their recent note to clients – that the Rudd’s government’s mining tax is a prime cause of the dramatic collapse in the Aussie sharemarket and Aussie Dollar.

From Business Spectator:

Global stock markets are losing faith in governments to manage the escalating problems stemming from the sovereign debt situation. But it is worse than that. Bankers are also losing confidence in governments. The sharp falls in stock markets will affect business activities and will have repercussions on economies around the world.

Solvent governments such as Germany are effectively borrowing vast sums to prop up bankrupt countries like Greece and most of the other PIIGS . The bankers say it will not work. Traders are liquidating their portfolios and the shorters are selling European shares.

And whereas we should have been one of the pillars of stability in this global crisis, our crazy mining tax has caused Australia to be in the front line of the market fury.

We have already been hit by a massive bear raid and now we will hit again by the falls on Wall Street.

We need good government at this crucial point in history. Instead we have bad government, so our economic recovery will be stalled if markets keep plunging. Treasury’s optimistic budget forecasts now look as silly as its mining tax.

Smashed $A – Rudd’s Super Tax Blamed

21 May

Goldman Sachs’ Australian subsidiary, JBWere, has issued a note to clients highlighting the reasons for the ongoing rout in the Australian Dollar, which has nose-dived from USD93c to just USD81c (at time of writing) in just three weeks since April 30.

via ZeroHedge:

Despite our belief that relative growth and relative interest rates suggest some support for the A$ over coming months, it is hard to see a swift resolution to the major sources of risk aversion impacting Australia and its hard to build a compelling case for offshore investors to bid the A$ higher. In that environment it will be difficult for our long-standing 95c target for the A$ around mid-year to be met; however, we still think our 12 month 90c target is still feasible, albeit with the path to 90 now likely to be via near-term weakness. Whether an ongoing decline in the A$ is in prospect will partly hinge on whether the Treasury Secretary’s suggestions that the WACC for the resource sector will be lower are viewed by the market as valid arguments or not. In sum, it is not just risk aversion that is driving the A% lower at present, fundamental factors have also been very important (relative growth, shifting rate expectations, lower commodity prices and capital exit) and the path to lower risk aversion is less dependant on the typical ebb and flow of market sentiment and highly dependant upon the actions of policy makers in Australia and Europe. Our A$ forecasts are now under review.

(emphasis added)

So there you have it, from one of the world’s most powerful investment banks, in their advice to clients. “Fundamental factors” have been “very important” in the rapid sell-off of the Australian Dollar.  And a key factor blamed, is the Rudd government’s “Resource Super-Profits Tax” (RSPT), inspired by Treasury Secretary Ken Henry.

(This is the same Ken Henry who utterly failed to foresee the GFC coming in 2007-08.  The same Ken Henry who, in February this year, publicly announced that the GFC is ‘over’, and predicted that Australia is set for a period of “unprecedented prosperity” lasting to 2050)

The financial markets are now considering the AUD to be a high risk currency. And according to JBWere, the “path to lower risk aversion” is “highly dependant on the actions of policy makers in Australia…”.

Rudd’s proposed “super tax” on the mining industry is not just wiping tens of billions off the value of Australian mining company shares – and the value of your Superannuation account.  It has also pulled the floor out from under the Aussie Dollar.

Insulation program. School halls. Border protection. Computers in schools. Renewable energy. FuelWatch. GroceryWatch. “The greatest moral challenge of our time”.

Does everything this government does turn to $***?

Joyce: Rudd Expects Miners To Pay Off The Debt

20 May

Media Release – Senator Barnaby Joyce, 19 May 2010:

Senator Barnaby Joyce, whilst on his “Straight Talking Tour” in Deniliquin said, “It was interesting to read the answer given yesterday to a question I asked on notice at the Senate Standing Committee on Economics in February as to what our debt position is.”

In 2008, there were six countries in the OECD that had higher net foreign debt as a proportion of GDP than Australia. These countries are Iceland (355 per cent of GDP), Portugal (72 per cent of GDP), Hungary (72 per cent of GDP), Greece (68 per cent of GDP), Spain (66 per cent of GDP) and New Zealand (60 per cent of GDP). In the same year, Australia’s net foreign debt amounted to 56 per cent of GDP. Around 10 per cent of Australia’s net foreign debt is held by the public sector. In the US, around 64 per cent of its net foreign debt is held by the public sector while in Greece, the public sector holds more than 100 per cent of the stock of net foreign debt.

“I also note that our Commonwealth gross public debt has gone from $139.182 billion to $141.282 billion in the last week. In addition to this is the fact that the aggregate borrowing of the states’ non-financial public sectors is expected to be $164 billion in 2009-10. There is also the money owed by entities such as utility companies that have borrowed money to pay state so-called ‘dividends’. As these debts do not come under the government sector financial reporting, who knows how much they owe.

Are we to believe that this government with their current track record has the capacity to fix things up over the next three years?

The Labor government solution is to go to the only section of the community that is making good money and to impede them on the capacity to pay off the debt. Australia has to maintain the vibrant integrity of its mining sector especially if the global economy starts to peel off through the ructions that are currently being seen in Europe. A resource tax would have to be the most foolish decision that a government could make at this point of time in global economics.

The Labor Party members have to ask themselves one question. If the mining sector is not bringing in money to our nation, and the agricultural sector, which they have managed to tie up with green and red tape, is not bringing in the money, then where exactly are our export dollars going to come from? Export dollars underpin the service industry where the vast majority of Australians work. You may not work in an export industry, but your pay depends on them.

In simple terms, if no money turns up on the table from export dollars, there is no money to pass around the table to reflect our GDP and ultimately to pay the debt on what is one on the most indebted nations on earth.”

More Information- Jenny Swan 0746 251500 / 0438 578 402

Is The China Bubble Starting To Burst?

14 May

We’ve just seen the Rudd Government present a truly fantastical budget.  One that relies completely on the hopeful fantasy that the Chinese building boom will continue for a decade to come, and so, a “great big new tax” on the “super profits” of mining companies can return the budget to surplus.

A lovely story.

But what do professional strategists on the China economy have to say about China’s prospects?

From MarketWatch:

China’s economy is teetering on the edge of a major slowdown … according to a noted China strategist.

David Roche, an economic and political analyst who manages the Hong Kong-based hedge fund Independent Strategy, says the world’s third-largest economy is now on the brink, faced with the inevitable reckoning that follows an extended bank-lending binge.

“We’ve got the beginnings of a credit-bubble collapse in China,” said Roche, predicting the economy will likely cool from its stellar double-digit growth rate to a 6% annual expansion as a result.

While that may not sound bad, Roche believes the collateral damage from the cooling will be anything but mild, as the banking sector comes under pressure from cumulative years of bad investment and mispriced capital.

The emerging picture is one of a substantial contraction in credit growth and infrastructure expenditure, he says.

The shrinkage is grim news for an economy heavily dependent on such outlays. China managed to escape recession during the global crisis mainly because of bridges, railways and other infrastructure-project spending, estimated to have accounted for about 90% of economic growth last year, according to Roche.

About 85% of the funding for these projects was arranged by local government financing vehicles “borrowing money they can never repay” from state-owned banks, says Roche. Nearly 3 trillion yuan ($440 billion) of the 11 trillion yuan extended to these entities has been wasted or stolen, he estimated.

***

More worryingly, as bank lending dries up, there won’t be the firepower to sustain new investments in infrastructure, eroding a core pillar of China’s growth model, he said.

Much of the focus on potential asset bubbles in China has been on the property sector, but Roche suggested that housing-price inflation is intertwined with unsustainable gains in other areas.

***

A slowing Chinese economy could also have ramifications for the resource sector.

A scaling back of the infrastructure-building binge is negative for industrial commodity prices such as copper and iron ore, with the latter potentially slumping 50%, he said.

“I would not own resource stocks,” Roche said.

Iron ore prices to fall by 50%?

Hmmmmm… any guesses what that would do to the “super profits” of mining companies? And to the “great big new tax” that Rudd Labor is relying on to get the budget back to surplus?

UPDATE:

Calculated Risk notes that the Shanghai Composite Index is falling already –

Keep an eye on the Shanghai index (in red). It appears China’s economy is slowing.

Shanghai SSE in red (click to enlarge)

Surpluses By Sophists

13 May

Stephen Bartholomeusz at Business Spectator shines a brilliant, all-revealing light on the Rudd Labor “return to surplus”. Unsurprisingly, he shows that the government’s latest budget is really just an exercise in pure political sophistry:

Wayne Swan might claim that the Federal Budget wasn’t a political document but the lengths the government has gone to so it is able to forecast a $1 billion surplus in 2012-13 while still being able to announce some popular pre-election spending tends to contradict his stance. In fact the budget represents a very clever political strategy.

It is a strategy built on the mislabelled resource super profits tax and the increase in tobacco excise announced just ahead of the budget. Without those taxes the surplus wouldn’t have arrived three years earlier than originally forecast, assuming it does arrivethe whole budget is predicated on a massive windfall from the terms of trade generated by a continuing book in commodities.

The really clever bit is that Swan and Rudd know that the opposition can’t support the RSPT, at least in its present form.

By dedicating the revenues they say they will raise from that tax to spending on health, superannuation, cuts to company taxes et al they appear to have funded the core of their platform and will be able to go into the election with the cloak of fiscal rectitude – even though the detail of the tax and the actual revenue it will raise, if any, won’t be known until after the election.

The opposition, therefore, if it wants to match the government in terms of fiscal credibility and deliver that surplus in three year’s time, will start at least $12 billion behind it. It will either have to propose slashing spending or raising taxes, or both to fill in that gap.

The government is presumably betting that the RSPT and its attack on greedy miners and their foreign owners will play favourably in the electorate, particularly as the tax will be dedicated to probably popular measures. So, the opposition will be accused of supporting big miners and opposing worthy spending if it opposes the tax and the measures it is supposed to fund.

After the election, of course, if the Rudd government were returned, their planned protracted ‘consultation’ with the resource sector could, and almost certainly will, lead to significant changes to the detail of the tax.

However, while it might look like clever politics, the RSPT is destructive economics which is going to have a chilling effect on resource industry investment until it is finalised and certainty is restored and which will have long-term and damaging implications for perceptions of sovereign risk and Australia’s attitude towards foreign investment and investors, given the way the sector was ambushed by the nature of the tax and the language the government has used in promoting it.

Whether the tax is ultimately imposed in its current form or redesigned, it won’t raise the revenue the government is claiming it will to get to that $1 billion surplus and, in the meantime an increasingly angry resource sector is telling the world that Australia is now a less attractive and less stable destination for mining sector investment – direct or portfolio.

The RSPT might represent a clever political strategy but the way it has been unveiled and the anti-industry and xenophobic language the government has used to leverage the political mileage in it is increasingly damaging to the national interest.

Regions Lose Under Budget

12 May

Media Release – Senator Barnaby Joyce, 12 May 2010:

Senator Barnaby Joyce asked today, “What has regional Australia been given in this budget?”

“Australia is heading toward a peak debt position, so the Labor Party tells us, of $222 billion. However, they are so totally unbelievable with every other prediction they make, you can take this prediction with a grain of salt.

Their plan to pay for their stuff ups comes from another attack on the mining wealth of regional Australia. Trouble is the stuff ups seem to be continuing at break neck pace. The Labor Party has managed to avoid this absurd form of economics since the attempt to nationalise the banks in 1949.

If you tax the mining profits to 57 per cent, the mining companies will be sure to be highly motivated to do one of two things. Move their operation to somewhere else or move their profits somewhere else. With the presence of vertically integrated cross border mining companies in Australia, this will not be as hard as some think. The trick will be how you trace profits. I can see a lot of hard work and brave souls that will have to exist in the tax department if this tax ever comes in.

The only sensible thing to do is to stop the tax. Mining has provided many regional areas with a once in a lifetime chance for development and the Labor Party has once more become a  parasite on the benefits.

If the Labor Party was interested in getting a fair deal for regional Australia, they would have announced in the budget a plan to return some of these extra funds to the areas where they were generated.

This budget is yet another promise the Australian people are expected to believe even though the Labor party has never got within a bulls roar of being an economically responsible government.

This time we’re supposed to believe they will be earnest, just like when they were earnest about the ‘greatest moral challenge of our time’,” said Senator Joyce.

More Information- Jenny Swan 0438 578 402

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