--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Feb 12 The increasingly
strident calls by some Australian politicians to either tighten
or scrap the country's controversial mining profits tax ignore
that the measure is working as it is supposed to.
The response to the Labor Party government's somewhat
sheepish announcement that the tax raised just A$126 million
($129 million) in its first six months, nowhere near the
budgeted A$2 billion, has been predictable and unimaginative.
The government has engaged in shifting the blame to volatile
commodity prices and the strong Australian dollar to cover its
embarrassment that the budget surplus it promised on the back of
the mining tax has evaporated.
The left-of-centre Australian Greens, which along with three
independents, support the Labor-led minority government, want to
change the law so that it raises more revenue.
Meanwhile, the main opposition Liberal-National coalition,
which was never in favour of the tax and is leading the opinion
polls ahead of the federal election scheduled for September,
wants it scrapped.
All of this fails to take into account that the Mineral
Resource Rent Tax (MRRT) was designed to extract more money from
the big coal and iron ore miners when they were making
While the design of the tax is by no means perfect, it was
never meant to be a gouge, or an unfair burden, on resource
Rather, as they made more money from selling iron ore and
coal, mainly to China, the miners would have to hand over some
of the additional proceeds to the government, in addition to
normal corporate taxes and mining royalties.
The MRRT was set at 30 percent of assessable profit of coal
and iron ore miners once profits reached A$75 million, and it
came into being on July 1, 2012.
Companies are allowed to deduct an MRRT allowance of the
long-term government bond rate plus 7 percent and there is also
an extraction allowance, but the main concession is that
royalties imposed by state governments are also deductible.
The tax had a controversial birth, having originally been
mooted as the Resource Super Profit Tax in 2010, and it was to
be levied at a 40 percent rate and apply to all minerals.
After a concerted campaign by mining companies and the
Liberal opposition, the Labor Party dismissed former prime
minister Kevin Rudd from his post and replaced him with current
leader Julia Gillard, who appeased the mining lobby by
negotiating the watered-down MRRT.
Whether this was good politics or not is open to debate, but
the Labor government's mistake appears to have been to assume
that the commodity price boom was an ongoing story that would
deliver a revenue stream they could use to fund their
However, it didn't quite pan out that way, and the tax's
introduction coincided with a slowing of growth in China,
Australia's biggest customer for mineral exports, as well as
renewed recession in Europe and concern in the United States
about the looming "fiscal cliff".
Asian spot iron ore prices .IO62=CNI-SI fell to a
three-year low of $86.90 by Sept. 4 from around $134 a tonne at
the end of June, before recovering to reach $144.90 by the end
of the year.
Regional benchmark coal prices at Newcastle port
dropped to $80.82 a tonne in mid-October from
$97.31 a tonne at the end of June, before recovering to $92.25
Both have improved further in 2013, with iron ore reaching
$155.10 by Feb. 11 and coal $96.09 by Feb. 8, meaning the tax
should raise more in the first half of 2013.
But what the pricing shows is that there was a significant
drop in both iron ore and coal in the second half of last year,
and that would have all but eliminated the excess profits the
MRRT was supposed to capture.
It's also worth noting that the MRRT was being put together
in 2010, with iron ore above $180 a tonne in April of that year,
while coal hit $136 a tonne in January 2011.
Clearly the Labor government expected those sorts of prices
to continue, or thought that if they did decline, it wouldn't be
to the extent that they actually did.
The government wasn't alone in expecting the boom prices to
continue, but the error has severely dented their credibility in
an election year and should be a warning to politicians not to
spend money they don't actually have.
But the MRRT is not at fault, in fact, it would be more
problematic if it was currently extracting more revenue from the
mining sector, given the pressure on companies to contain costs
in the face of lower commodity prices.
The MRRT is meant to be a "good times" tax, not a permanent
revenue collector such as a resource rent-type impost, which
levies a charge on each tonne of ore mined regardless of what
the producer can actually sell it for.
Such a tax would have accelerated job losses, mine closures
and a much bigger scaling back of investment plans than the MRRT
Fiddling with the MRRT to ensure it raises more money, even
in bad times, would be a silly and self-defeating mistake for
any government, while scrapping it altogether means forgoing
revenue in good times.
The risk for Australia is the seemingly never-ending
adjusting of the tax system undertaken by both major parties,
mainly based on ideology rather than good public policy.
If the Liberal coalition does triumph in September's vote,
expect another bruising and counterproductive fight over tax
policy, which can only serve to make Australia a less attractive
place to do business.
(Editing by Joseph Radford)