Business Spectator News (On Mine tax)

Grasping the MRRT's property peril

Robert Gottliebsen

Published 6:48 AM, 15 Sep 2010 Last update 10:19 AM, 15 Sep 2010

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The value of Australian houses and the level of the Australian stock market weigh heavily of the shoulders of Resource Minister Martin Ferguson and his “assistant”, former BHP Billiton chairman Don Argus.

The Ferguson-Argus committee has the task of refining and detailing the so-called MRRT which was the previous government’s second attempt at a mining tax. (See Time is miners' money , July 12.) The problem for the Gillard government is that the billions in revenue expected from the new mining tax hinges on estimates of world economic growth set prior to the most recent sharemarket rout.

Already the Greens and one or two of the independents are baying for more money from miners while the smaller miners say that the MRRT will make many of their projects uneconomic.

It is almost impossible to satisfy the two extremes. But first let’s underline what is at stake. Australian house prices are maintained at current levels because the world money markets are prepared to lend vast sums to Australian banks – funding about 40 per cent of every loan the banks make. The overseas institutions lend big sums to Australian banks in part because they have confidence that the country’s economy will be underpinned by hundreds of billions earmarked for new Australian mining projects. If the overseas institutions think that Australia will take actions that will halt much of this mining investment, the overseas banks will reduce the amount they are prepared to lend to Australian banks. (See A mammoth capital strike looms, May 6.)

In turn that will mean that there will be less money available to fund Australian houses and/or interest rates will need to be increased to attract a much bigger proportion of the Australian savings market into bank deposits. If either of these events take place house prices will decline sharply and the stock market will be ravaged slashing the value of Australian superannuation savings. (The RSPT's property price risk, June 16.)

A recent address by Don Argus indicates he understands just what is at stake. And Martin Ferguson is one of the more impressive ministers in the cabinet so I am sure he also understands.

The Argus address set out in chilling detail how vulnerable we are if our hung parliament gets it wrong on the mining tax. Argus points out that Australia has only 15 per cent of global iron ore and just six per cent of black coal. So if we make it uneconomic to develop our iron ore or coal mines, then there is plenty or ore to be mined around the world. Much of that additional iron ore is in Africa and its true that African politics makes miners, even Chinese miners, a tad nervous.

But, according to Argus, the original mining tax, the RSPT, set the Australian rate at 58 per cent. This compares with US (40 per cent); Brazil 38 per cent; South Africa (33 per cent); Peru (32 per cent); Russia (30 per cent); China (30 per cent); and Canada 23 per cent. A 58 per cent tax rate put us out of the ball park and the global miners would have switched their investment dollars to other countries, including African nations. The original mining tax would have decimated our country as all readers of Business Spectatorknow. (See An RSPT victory, July 2.)

The proposed Gillard mining tax is 45 per cent and this higher tax is confined to iron ore and coal. According to Argus, the proposed 45 per cent rate compares with the current mining tax rate of 38 per cent, which is already close to the top of the table. The proposed 45 per cent tax still makes us the highest taxed stable mining country in the world but the rate is even higher for leveraged miners, which is why they are complaining.

It is likely that the Ferguson-Argus committee will address the highly leveraged small miners anomaly. Importantly, the new mining tax does not tax infrastructure investment but concentrates on the actual mining process. The government is gambling on a major boom in iron ore and coal prices to raise the money to go into surplus.

While 45 per cent is a large tax take, the political stability of Australia means that many projects will go ahead which combined with the coal gas projects (which are taxed differently) will ensure the Gillard mining tax will not cause bank funding problems.

The Greens and the independents have no idea of the danger their policies pose to Australian home owners and superannuation savers. However the Coalition understands the issues and will face some interesting decisions as to whether they block the Ferguson-Argus proposals, so giving power to the Greens and independents.

My guess is that the intellectual horse power of Ferguson and his “assistant” will carry the day but we all must understand that we are playing for big stakes.