Why we need a Resource Super Profits Tax

Prior to the Henry Review there was speculation that the Commonwealth government would have to negotiate with the States to abolish their royalty regimes. However, the scheme announced by the government allows the State royalties to be deducted against RSPT obligations. That effectively gives the States first claim on super profits. This may well be taken as an implicit recognition that the States have a more direct claim of ownership of the resources concerned.

The last mining boom gave very little by way of benefit to most ordinary Australians. Indeed, prior to the global financial crisis most people would have been affected only by the higher interest rates on their mortgages caused by the Reserve Bank’s attempt to offset the macroeconomic impact of the mining boom. As the global financial crisis passes the mining boom has returned and once again the benefits are unlikely to touch most Australians, but the Reserve Bank response will.

In this context the RSPT is a vital mechanism for capturing some of the national benefits of high commodity prices and distributing them more widely. Without the RSPT mining companies and their largely foreign shareholders would get virtually all the benefits of Australia’s superior resources while the bulk of Australians are either barely affected or made worse off.

Of course the question of distributing the gains raises a host of issues, and most of us would have different opinions as to the best use for any surge in revenue. Not surprisingly there has been some debate about how the additional super profits tax should be used, with some emphasis on building up reserves for a post mining future. The government’s response goes some way towards that with its emphasis on infrastructure spending.

As for sharing the benefits of the super profits tax among individual Australians; most will go to superannuation benefits or lower company taxes that will benefit shareholders, including indirect shareholdings through superannuation. Nothing is expected to change for those on income support. Indeed, the Henry Report has flagged a reduction in pension payments through the use of lower rates of benefit indexation.

Likewise there is little so far from the government that goes towards assisting the sectors that have been adversely affected by the indirect impacts of the mining boom. All other trade-exposed sectors of the Australian economy have had to put up with a loss of competitiveness as the Australian dollar appreciated. Tourism and manufacturing appear to have been particularly hard hit.

A more imaginative approach could have addressed some of the other problems associated with the mining boom, in particular the tendency of the mining boom to squeeze out other sectors such as agriculture, manufacturing, tourism and other trade exposed sectors. A fund that is used to invest offshore can offset the cash inflow associated with mining revenue and so remove the pressure on the exchange rate. This is the approach taken by Norway’s Petroleum Fund. In addition, by keeping some of the RSPT revenue offshore the government will not be tempted to spend the revenue in a way that might exaggerate the boom.

The important point here is not the details of how a mining boom fund might be set up but the recognition of the principle that if a mining boom is associated with a massive increase in cash coming into Australia, it should be offset with the government managing a simultaneous outflow of cash. The build up of a portfolio of overseas assets also makes a lot of sense as a means of hedging against a possible future when the mining boom might end, either through a crash in commodity prices or a depletion of our resources.

Indeed, it is not even necessary that the government undertake all the offshore investment. Super funds and other financial institutions could be encouraged to invest in offshore assets. The mining companies themselves might be encouraged to keep their profits surge offshore. The important thing is that we understand how the Norwegian Fund works and debate the need in Australia to set up a mechanism that would do a similar job.