super tax myths and facts, page-91

Frantic,

"I do not think we have Dutch Disease"

I don't have an opinion on this tax yet. I expect it will be adjusted to be equivalent to the PRRT but that still remains to be seen if that happens. Similarly I have no opinion on any alternative reasons for introducing the tax.

However, I will comment on your statement.

- Australia operates a flexabilbe exchange rate system. Under a flexabilbe exchange rate system, the currency will rise or fall until demand for the currency equals supply;

- In recent years, through the commodities boom, Australia exports have increased in both volume and value. This has resulted in upward pressure on the currency. The currency will rise to a level where again demand equals supply;

- What this means is that, as the foreign exchange earnings of a particular sector significantly rises, the currency will rise to a level such that either imports rise or other sector exports fall to bring about a balancing in the foreign exchange market;

- Consequently, a significant increase in earning of the mining and/or petroleum sector should result in a higher Australia dollar with both higher imports to Australia and lower exports from other sectors of the economy eg. more imports of 3D TVs etc., overseas manufacturede plant etc. and lower farm and other sector exports etc.

- The above argument ignores capital flows. Although these will have an effect it is not likely to change the tradeoffs mentioned in the previous paragraph;

- I note that Australia is about to enter a significant boom in the exports of LNG over the next ten years. We have Pluto 1, 2 and 3, Browse, Sunrise, Gorgon, Prelude, Itachy? off the WA coast and the coal seam Gas LNG from Gladstone. We also have significant expansion in iron ore from BHP, RIO and FMG in WA and some very large coal mines proposed for Queensland. If commodity prices stay high this should result in a higher A$ with higher imports and lower exports from the farming and other sector;

- I don't know how the proposed tax will effect any of this as, if they adjust the super profits tax to kick in when the return is above a companys cost of capital instead of the bond rate, it should not effect the level of investment. It is for this reason I expect them to equalise the tax with the PRRT. If they did this the government would be indifferent between a LNG facility been built in Queensland or off the coast of WA;

- As far as the trade deficit is concerned, it is my opinion that to reduce this the government would have to change some policy which would either increase Australian investment overseas or reduce overseas investment in Australia. For example tax incentives for investing overseas. The effects of these capital outflows would be downward pressure on the exchange rate result in an increase in exports and reduction in volume in the now more expensive imports;

- I have not seen any atatement from the government indicating in the slightest that the tax policy may be related to the government trying indirectly influence the foreign exchange markets. Rather, I think the government saw the mining sector making massive increases in revenues from iron ore and coal, saw a large junk of the Australian mining sector is foreign owned, saw it also needed a large increase in revenue to plug their deficit, thought it would announce a tax on profits above the bond rate which after negotiation I expect will end up a tax on profits above the mining sector's cost of capital;

Just my opinion anyway.

Regards

SP