The proposed Resource Super Profits Tax is generating considerable interest and debate. I wrote an article which was published in The Australian on 25 May, despite being somewhat reluctant to become involved in the debate, having retired some time ago from corporate life.
However, I was motivated to write the article because of my concern that the consequence of implementing the new tax, as currently proposed, could lead to a change in the way external investors and lenders view Australia in relation to sovereign risk. Australia has enjoyed a very good reputation over many decades. Any downgrading from this strong position will have consequences, not just for the mining industry, but for the Australian community generally.
Where sovereign risk is perceived to be an issue, two consequences follow. Capital becomes more difficult to obtain to fund activities in the nation generally, and it becomes more expensive, including for the funding of budget deficits, because the perception of sovereign risk gets priced into financial transactions. It is this factor that mostly concerns me because of its implications for the community over a lengthy period into the future.
Collecting a higher level of taxation from the mining industry for government to disburse for other worthwhile purposes may be perceived as a positive contribution to the Catholic principle of the 'common good'. However, if a badly designed and executed change results in much reduced government revenue in the future and a higher cost of funds that Australia, as a capital importing country, requires, then the contribution to the common good is negatively affected. Such an outcome would impact on the whole community, because borrowing will be more expensive.
Governments have the power to change regulations, including taxation, and to trade off future investment and jobs for a larger tax take in the shorter term. But the consequences need to be understood and appreciated, and the community needs to be fully informed about them.
There are flaws in the currently proposed model that will have unnecessary adverse impacts on future activity in the mining and associated industries. While markets remain strong, current mines would continue to operate under the proposed new tax arrangements because the capital is already sunk. But future capital expenditure will be constrained because only very rich ore bodies will be viable with an effective tax rate of 57 per