Hurrah for Garnaut on Resource Rents

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Creative Commons License photo credit: Ben Golub



With Don Argus (former BHP Chair), Judith Sloan (former Santos Director) & Andrew Forrest (vested interest) banging their fists on the table this week, scaremongering the public – ‘How Dare They Threaten My Investments, My Profiteering from the Common-Wealth’, it was with great relief to see Ross Garnaut, author of the authoritative 1983 book The Taxation of Mineral Rent deliver an authorative speech at Melbourne Uni last night.

He set his sights on the threat to democracy by vested interests crowding out the media landscape from rational debate on the SPRT. Garnaut also goes into detail in his speech to outline the efficiencies of capturing economic rents. It is well worth a read to see him expand on economic rents and how they are calculated.

Don Argus today complains that ‘we don’t understand the assumptions in the model’. Perhaps he should study economic rent as explained by Henry in section C of his review or as Garnaut displayed in this speech.

Please download Garnaut’s speech from last night and/ or read the shortened version in this article (In)vested Interests from today’s Age:

THIS is a dangerous time for our country in a dangerous world. Europe is floundering, as governments wake up to the consequences of socialising the losses of private financial institutions in response to the global financial crisis.

In the United States, a clever and politically skilled President is battling with domestic problems on a daunting scale. The US has fewer political and fiscal reserves than at any time since the 1930s with which to come to the aid of a North Atlantic world in trouble.

This is all the legacy of the Great Crash of 2008.

The Great Crash raises fundamental questions about the capacity of contemporary governments of democratic capitalist countries to implement policies in the public interest that are contested by powerful private interests.

Australia is, for the moment, faring better in the aftermath of the Great Crash of 2008 than other rich countries. The sustained rapid growth in large Asian developing economies has helped, by lifting our terms of trade and investment in the resources sector.

After the capitulation on climate change policy, it might have seemed unlikely that the government would bring down a budget that honoured the critically important fiscal straitjacket that it had draped around itself, and confronted the resource sector interests to which it had yielded in the climate change debate on an issue that was much more consequential to the interests concerned. Unlikely, but it has happened.

A committee chaired by the secretary of the Treasury has prepared an uncompromising statement of one conscientious perception of the national interest in an important area of policy. The government has embraced the statement, and made it a central feature of an overall fiscal program that, if maintained, would have no near comparator in the developed world for rigour or suitability to the circumstances.

The budget and the resource tax have drawn a powerful negative response from businesses in the resources sector. There is nothing unexpected about that. What we do not yet know is whether this episode will confirm the descent of Australian political culture into a North Atlantic malaise, or represent a revival of the capacity of the Australian polity to take positions in the national interest, independently of sectional pressures.

Let me be clear about what I am and am not saying.

We have before us a public policy issue of great complexity and importance. I am saying that the government has taken a position on the basis of advice of people of knowledge and standing that asserts some hard propositions about the national interest, at the expense of some private interests that exercise considerable influence in our polity.

It is critically important to our future that we are able to discuss hard policy proposals on their merits, so that an informed perception of the public interest can emerge and eventually win broadly based support.

I am not saying that the secretary’s proposals are right in every detail, or that it is in any way illegitimate to contest them.

What is important is that this time, on this subject, we demonstrate that we can still discuss policy proposals with clarity and rigour, listening to interested parties, with their words having influence according to their content, and not according to the cruder instruments of political influence that accompany them.

Within a sound discussion of the public interest, the Treasury and the Commonwealth would be prepared to listen to the debate and to contemplate variations on their approach. Within a sound discussion, it would be possible for the authorities to accept that the conditions for neutrality of the modified Brown tax were not present in sufficient degree, and to contemplate variations on the Henry review theme that achieve the desired objectives through related but different means.

My own suggestion for consideration in that eventuality has two elements. At the exploration stage, a full loss offset in cash at the tax rate (that is, a pure Brown tax). The rebate would cancel any need for carrying forward exploration expenditure against revenue in assessment of resource rent tax. This is quite independent of the proposed rebate of exploration expenditure within the company income tax system.

At the mine development and production stages, a resource rent tax in roughly the form and at the rates of the petroleum resource rent tax. The special arrangements in the resource super profits tax to cash out past losses with interest and to transfer losses across projects would not be relevant and would not apply.

At the production stage, the resource rent tax and the Brown tax and the modified Brown tax would be similar in their effects, and the structure of the petroleum resource rent tax would serve. I hope that the relevant governments would also accept the Henry review’s recommendations on allocation of exploration rights by competitive tender where they can reasonably be expected to generate positive value. The new arrangements-the modified Brown tax, or the variations suggested in case the conditions for neutrality of the modified Brown tax were not met- would have good prospects for future stability. This would serve the interests of investors and the community. They would be consistent with healthy growth in the resources industries in the period of great opportunity that lies ahead.

There are two reasons to expect Australian governments to seek to extract the economic rent as revenue: it has lower economic costs than other forms of taxation; and it represents the value of public property that is being transferred to private ownership.

Many Australians would add a third reason: that the recovery of mineral rent from the companies to which rights to mine have been allocated for the community represents a move to more equitable distribution of income, in a way that has lower economic costs than other measures to promote distributional equity.

It is important that the range of views be tested analytically from various perspectives on the national interest in the period ahead.

At this dangerous time for the world and for Australia, it is important that we restore a capacity for Australian governments to implement policy in the public interest, independently of pressures from private interests.

Professor Garnaut is vice-chancellor’s fellow and professorial fellow at the University of Melbourne and chairman of Lihir Gold. This is an edited version of a speech given at the Melbourne Institute last night.

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