oecd urges australia to boost mining tax

AFP
November 14, 2010, 3:06 pm

SYDNEY, Nov 14, 2010 (AFP) - - The OECD Sunday urged Australia to extend its mining profits tax and save the spoils, warning that reliance on the China-linked resources boom posed "important risks" to its growth.

The Organisation for Economic Cooperation and Development said Australia had rebounded powerfully from the global slump and described its prospects as "among the strongest in the OECD" due to the bullish mining sector.

But the OECD said the government must ensure it was not too dependent on fluctuating commodity prices linked to fast-growing China and India, and urged it to beef up its proposed 30 percent tax on coal and iron ore profits.

"The potential gains of the MRRT (Mineral Resource Rent Tax) may be reduced by some of its characteristics," the OECD said in an economic survey published Sunday.

"The proposed tax is set at a relatively low level and... the efficiency gains of the new tax will be mitigated by its coverage of only larger firms and certain sectors."

In its current form the so-called "super tax" was likely to distort investment incentives because it only applied to iron ore and coal, with a "particularly large" deterrent effect for marginal projects, the OECD said.

"A well designed resource rent tax extended to all commodities and all companies irrespective of their size would be desirable," it said, also urging the elimination of state royalties to simplify and level the tax system.

The super tax -- originally with a headline rate of 40 percent -- was watered down in July after a major outcry from mining giants including BHP Billiton and Rio Tinto prompted a coup against then-prime minister Kevin Rudd.

His successor, Julia Gillard, backed down on miners' demands that the tax be slashed to 30 percent and only apply to the coal and iron ore industries.

But future of the tax is now uncertain, with Gillard failing to win a majority at August polls, leaving her reliant on a handful of independent MPs who oppose the plan in its current form or reject it altogether.

The Paris-based OECD said "weaker growth in China and further financial turmoil" posed downside risks to Australia's economy and called for mining tax earnings to be saved rather than spent to shield against future downturns.

Reforms are vital to boost housing supply and meet labour and infrastructure shortages while managing inflation as the country rides a resources rush which has "hidden a decline in productivity growth", it added.

Treasurer Wayne Swan said the OECD report card was a "strong endorsement" of the government's fiscal management and bolstered its resolve to broaden Australia's economy.

"Building economic capacity is at the core of the government's economic plan, and we will continue to make the necessary investments to achieve sustainable growth and job creation into the future," he said.

Official mid-year forecasts released last week showed Australia was on track for 3.25 percent growth this year and a return to budget surplus by 2012-13, with unemployment to drop to 4.5 percent, from 5.4 percent currently.

The OECD questioned whether Canberra's ambitious plan to connect 93 percent of Australians to super-fast fibre-optic broadband Internet through a state-owned corporation was "optimal for cost efficiency and innovation".

It described the introduction of "market mechanisms to set a price on carbon" as the most pressing issue for the country's energy sector, also urging the expansion of public transport and introduction of congestion taxes.

The OECD also recommended better management of the country's water and electricity resources and said Australia should have an "open, demand-driven" immigration policy which better recognised offshore qualifications.

It flagged GDP growth of 3.3 percent for 2010, 3.6 percent for 2011 and 4.0 percent for 2012 -- roughly in line with government forecasts.

ajc/ft