From Commonwealth BankThe Government has opted for one bold...

From Commonwealth Bank


The Government has opted for one bold reform. Or at least it will be seen by many to be bold. The Resources Super
Profits Tax (RSPT) is the centrepiece of the Governments reform package. But resources rent taxes are not new. They
have been implemented overseas, and were also featured in the Asprey tax review. There is already a rent tax regime in
operation in Australia. The Petroleum Resource Rent Tax (PRRT) regime was introduced in 1987. The looming LNG
investment boom, anchored by the Gorgon Gas Project, is going ahead under the PRRT. The Government has structured
the RSPT in a way that avoids double taxation and encourages investment, production and employment in the mining
industry. Industry will no doubt loudly protest at the push to restore the communitys share of mining sector profits to preboom
levels. But KPMG modelling of the reforms impact on the industry estimated the reform to resource sector taxation
could result in a 4.5% increase in investment, a 7% increase in employment and a 5.5% increase in output in the long term,
relative to the status quo.
The design of the RSPT aims to reduce the hurdle rate for mining project investment. Its operation also reduces volatility in
returns to mining shareholders across the cycle. The Government is also seeking to enhance the performance of the
mining industry and the economy more generally. The Governments response includes a state infrastructure fund. In
recognising the boost to mining investment, production and employment generated by the RSPT the Commonwealth is
seeking to support the states in the provision of infrastructure to accommodate the expansion of the industry.
The Governments reforms will encourage further expansion in the capital intensive resources sector. Firms in other
sectors of the economy will also be incentivised to undertake additional investments through reductions in the corporate
tax rate. Australias economy will benefit from increased investment. Workers and firms in non-mining sectors will need to
become more productive in order to survive the mining boom. This is where the reforms to the corporate tax rate and
simplifying small business depreciation deductions deliver. Higher investment should lead to greater capital intensity,
which leads to higher productivity. Higher productivity workers also tend to enjoy higher real wages. In this way the
Governments reforms to go some way to insulating the non-mining sectors of the economy as the commodity boom mark
II rolls on.
Raising the capital intensity of the economy wont come easy. Australia is a capital importer. The nations savings rate is
relatively acceptable, but it is no match (it falls well short) for the high levels of investment. The Governments response
aims to boost national savings through increasing superannuation contributions. The superannuation guarantee is slated to
be increased from 9% to 12% in stages, commencing in 2013/14 and running to 2019/20. This will boost the pool of
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Economics: Update
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superannuation savings for firms to draw on for investment. But the delayed response may mean the coming investment
surge may pass by the time the beneficial increases in the nations savings materialises. The nations near term
investments associated with commodity boom mark II will continue to be heavily reliant on foreign capital.
The initial reaction from the mining sector has been negative. Dont panic is the message from CBAs resources analysts
in relation to the RSPT. We would strongly endorse that view. Opportunities for miners to adapt and minimise their RSPT
liabilities will, predictably, be glossed over in crossfire over the course of the next week.
For the broader market the cut in the corporate tax rate is equity positive and corporate credit positive. The cut to
corporate tax rates and prospective increases in superannuation fund inflows are positive for corporate Australia broadly,
and for financial services and wealth management in particular. Currency markets may suffer due to the near term
resource hit media doomsaying. But the realisation that the RSPT is mining sector positive in the long run and the
confidence and transparency enhancing move towards a clear cut world class resource taxation regime should win out in
the end. The Governments response assists state budgets by providing funds for infrastructure spending. At the margin,
this serves to lighten the infrastructure spending burden the States face. Revenues from the RSPT are cyclical. The
Governments super profits tax take drops markedly when commodity prices wane. Design features mean it could also be
slow to wind up when prices rebound. The Governments reform package is revenue positive over the four years to
2013/14. But if commodity prices decline precipitously the impact on federal revenues could be painful. On the whole the
package is positive for the Governments finances. It boosts long-run GDP by 0.7%pts and real after-tax wages by 1.1%
(equivalent to $450 per year for a worker on average weekly earnings).




Good luck to all and DYOR