Friday, May 14, 2010

Conservative reply to Labor Party budget

Abbott vows to stop the ceaseless growth of the bureaucracy and stop strangling the mining industry

TONY Abbott last night declared war on Kevin Rudd's resource super profits tax and pledged to balance the nation's books through deep cuts in spending. "This reckless spending must stop," he said in his official Budget reply speech, a key test in the 2010 race for The Lodge.

Foreshadowing a "rolling" series of economic announcements in the lead-up to the election, he provided few details of his alternative plan but committed to wipe out the existing $40 billion deficit in the same time-frame as the Government but without big new taxes.

This will be achieved through cutting public servant jobs and slashing government advertising by 25 per cent. A two-year freeze on public service recruitments is calculated to save the Budget some $4 billion over the next three years. Uniformed and front-line service personnel would be excluded.

Risking the ire of business, he acknowledged that scrapping the mining tax would make tax cuts impossible. "Until Labor's debt and deficit has been dealt with, it's not hardness of heart but economic prudence to say "no" even to good causes," he said.

"In other circumstances, you could fund a company tax cut and depreciation allowances for small business but not at the cost of an economy-stopping tax on our most successful export industry."

The typically combative display showed he would not be dictated to by the Government's budget strategy which relies heavily on the $12 billion Resource Super Profits Tax yet to pass the Parliament.

"Let me make this clear, the Coalition will oppose the mining tax in opposition and we will rescind it in government," he said. "It's my goal to return the Budget to surplus at least as quickly as the Government proposes but not the lazy way through a great big new tax that threatens miners' jobs, retirees' incomes, and everybody's standard of living."

The Government's $16 billion school halls program would be restructured rather than cut by giving money directly to school communities. The national broadband network, however, would be scrapped.

Mr Abbott said, that if elected, he would be true to both the conservative and liberal traditions of his party. "We will be a contemporary government, not just a conservative one." Earlier in the day, Mr Abbott showed he understood the weight of the occasion.

"This is a very big moment for me," he said. That admission came as the Government launched a pre-emptive all-guns-blazing assault in a bid to deny him the scope to bring the Budget back into the black as fast as the Government's 2012-13 time-line.


It’ll be easy being green in Australia after $30m "education" campaign

Brainwashing and propaganda are always described by Leftists as "education"

THE government will embark on a $30 million “education’’ campaign on climate change, following the shifting public opinion on its failed emissions trading scheme. The national campaign will run on radio, print, TV and a dedicated website to “educate the community on climate change, including on climate change science,’’ budget papers said.

The government has also pledged an extra $102.7 million to deliver over 600,000 home sustainability assessments, which provide advice on ways to improve energy and water efficiency and reduce greenhouse gas emissions.

Investment in renewable energy will see an injection of $652 million over four years in a future fund, to leverage private investment in large and small scale renewable energy projects, including wind, solar and biomass.

Additional funding worth $178.2 million over two years for the international Climate Change Adaptation Initiative will go towards helping countries in the Pacific and Caribbean to ``better adapt to the impacts of climate change through improved scientific information, planning and assessment and financing of adaptation measures.’’

Treasurer Wayne Swan said the government ``accepts the science of climate change and the need for combined global and domestic action.’’

“As we continue to work to build the necessary domestic and international consensus for carbon markets, we will roll out the most substantial renewable energy plan this country has seen – consistent with our decision to increase the renewable energy target to 20 per cent by 2020,’’ he said.


Cheating teacher admits changing test results

Another teacher who just can't face having his poor performance known

A teacher at an Adelaide primary school has been suspended after admitting to altering national literacy and numeracy test results.

Another teacher at St Leonard's Primary School at Glenelg North dobbed in the teacher when she saw year seven NAPLAN test results being altered. It is not yet clear whether the teacher will be sacked.

South Australia's Education Minister Jay Weatherill says the students will be tested again to ensure the integrity of the controversial NAPLAN testing.

"An equivalency test is available. That test will be available to be administered next week. Parents will be advised this afternoon of the incident that has occurred at the school and the fact that every effort will be made to ensure that their students, their children are not disadvantaged," he said.

"On any objective view of the professional obligations of a teacher, this behaviour is utterly unacceptable. I think any teacher would understand that, even this teacher I think must be fully aware of the consequences of the action.

"This teacher has been stood down from duty and the disciplinary process will now take its course."


New resources tax a threat to all investment

I CAN understand the justification for mining royalties but the proposed resources rent tax makes no economic sense.

According to the traditional theory of the mine, royalties are levied as a payment to the owner of a resource to compensate for the depletion of that resource. The royalty is a price signal reflecting the fact that production subtracts from the value of a resource. Under simplified conditions the royalty on a unit of ore should be equal to the value of the same amount of ore in the ground immediately prior to depletion, appropriately discounted back to the present. This amount is hard to calculate in practice but the principle is clear.

By signalling that ore in the ground has a future value, royalties encourage conservation. The higher the royalty the more likely it is that production will be deferred into the future, perhaps to a time when resource prices are higher. In Australia, royalties are often received by state governments, which claim the legal ownership of minerals. But they can also be received by companies and individuals. Royalties would still be paid in a fully free enterprise system and, in the language of economics, they are required for inter-temporal efficiency, or efficiency over time. They also allow the owners of a resource to maintain their asset position; as their resource in the ground depletes, the royalties give them a flow of funds to purchase other and similarly valued assets.

Australian economists have tended to regard royalties as disreputable, perhaps because of the influence of the US approach to mineral economics. The theme of US mineral economic theory, which originated during the Depression, was that resources would always be plentiful and cheap without ever becoming exhausted. If ore sitting in the ground has no value, and the mining industry can always operate at constant cost, then mineral royalties would be just another government imposition and more resource misallocation. Yet the theory that once made sense in the US is highly anomalous in modern Australia. If there are excess profits in the Australian mining industry it is only because ore bodies do have a value.

In fact, the tax has no particular connection to mining or resources at all. If it were really appropriate for the mining industry, it should be equally appropriate for all other industries and for the same reasons. Excess profits are general, not industry specific. Additional 40 per cent taxes could be levied, with as much justification, on the excess profits of banks and the financial sector, farmers, shops, industrials, hotels or any other group we envied or disliked.

A resources rent tax is less efficient than a royalty precisely because the rent tax doesn't correct inter-temporal misallocation. The case for the resource rent tax is that it is neutral, meaning that it will not discourage investment. This is correct in the instance of a theoretical resources rent tax, which observes precise mathematical rules. It would tax the profits of all mining companies at 40 per cent but then it would have contributed 40 per cent of the total wherewithal to bring these companies to production. The government would pay 40 per cent of the total costs of the mining sector, but it would get 40 per cent of the total return. Conversely each mining company would put in only 60 per cent of the total costs, but each would take only 60 per cent out, leaving the company in the same position except that its scale would be reduced. The company would get less but it would also need less of its own finance to get a project started. The government would forgo tax receipts until its 40 per cent share accumulated, but eventually, if there were excess profits, it would be rewarded for years to come. But we have been talking about a theoretical resources rent tax, and between the theory and the fact there lies a large gap.

A theoretical resources rent tax resembles a sovereign wealth fund. A sovereign wealth fund would be even better than a theoretical resources rent tax because it would allow the government to select its investments. After all, the mining industry has more than its share of liars, lairs and lunatics and the government is not really in a position to invest 40 per cent across the whole sector without consideration of the details of any project. The differences between a theoretical resources rent tax and a sovereign wealth fund are:

(i) If someone wins the lottery, and if the government has paid for 40 per cent of all the tickets and gets 40 per cent of the prizes, then it has levied a theoretical resource rent tax.

(ii) If the government simply buys 40 per cent of the lottery tickets and takes its own chances, then it has established a sovereign wealth fund.

(iii) If the government claims 40 per cent of the prize after the event, offering to pay 40 per cent of just the one winning ticket, then it is a levy on capital.

The implementation of the tax will doubtless combine the theoretical resource rent tax with a capital levy but, whereas the neutrality of the resource rent tax has been emphasised, the capital levy will be the more significant part of the package. The theoretical resources rent tax is simple to express in general terms but it is extremely complex to implement. A government that tried to implement the pure form would not just subsidise contemporary exploration, but would pay its full 40 per cent share of all historical costs. It would offer 40 per cent subsidies for all the exploration that has previously occurred in Australia, and for all the past development and the infrastructure spending. The government would track down the mining firms that had failed and disappeared - the losers of the lottery - and offer their shareholders 40 per cent of their past expenditure. Alternatively it would offer the winners a risk premium, a substantial multiple of what they had spent, because they had climbed the investors' wall of worry while the government held back. But the government is not in a position to act in this way or on this scale. Nor do I believe that the government would want to outlay more money than it received for years to come.

Confiscatory capital levies do not have the properties of a resource rent tax and they are not neutral with respect to investment, enterprise and risk. Commonsense and experience suggest that a pseudo resources rent tax would substantially discourage mining investment. If it were perceived to be part of a pattern of confiscation it would discourage investment in all Australian industries for a long time to come. Would the reader still keep their money in a bank that had commandeered 40 per cent of the depositors' cash balances? It is not sensible to tax another 40 per cent of the value of the entire Australian mining sector, offer crumbs in return, and expect no repercussions on investment.

So what should the government do if the resource rent tax is abandoned? I believe state royalties are too low so there is room for the commonwealth to impose profitable ad valorem royalties (calculated as a fraction of the value of the mining output rather than dollars a ton) and good reason to put the money not into general revenue, but a sovereign wealth fund.

This should be structured to have resilience against downwards movements in the resource industry, for no one knows the future, and it should also be used to buy Australians a part ownership of the mining sector. That policy, unlike the resource rent tax, would be consistent with efficiency and economic growth.


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