We are now paying a heavy price for our failure to manage the mining boom. The consequences are all too clear, particularly in the manufacturing sector. The mining boom drove up our exchange rate and wage costs. A Sovereign Wealth Fund (SWF) and the Resource Super Profits Tax (RSPT) would have minimised the problems. However, few seriously proposed a SWF. The Coalition and the powerful mining companies did everything possible to destroy the RSPT.
The squandering of the benefits and opportunities of the mining boom is causing major disruption across the economy. What have we really got to show for the national treasure that we have squandered?
We can take some late remedial action by cutting back on business and middle class welfare which I have written about. We should also increase our very low levels of taxation, particularly to fund our long term infrastructure needs, both physical and human.
The Norwegians point the way for us in their establishment of a SWF in 1990. It was called the Government Pension Fund Global.
- Last month each Norwegian became a theoretical millionaire through ownership in the Fund, but they would not have been able to spend the money. It was saved and invested for future generations.
- The fund was set up to avoid the temptation by governments and the public to splurge the windfall returns following the discovery of oil and gas in the North Sea in 1969.
- The funds the government receives in oil and gas revenue are invested almost exclusively abroad, rather than in Norway.
- Exchange rate remained relatively stable and cost rises were checked. Unemployment has been kept low.
- The Norwegian Finance Minister in January this year said “Many countries have found that temporary large revenues from natural resource exploitation produce relatively short-lived booms that are followed by difficult adjustments”.
This is not to say that Norway doesn’t have problems but the fund has helped iron out big swings in oil and gas prices, stabilised the economy and allowed Norwegians to invest for the future rather than squandering money in the boom times
We should have done the same. But at least we can be ready for the next mining boom which will inevitably come. Will it be in gas?
Our Futures Fund just does not cut it alongside the successful funds established in Norway and elsewhere. Large SWFs operate in Saudi Arabia, UAE, China, Kuwait, Hong Kong, Singapore and many other countries.
Instead of a SWF, we could have run much larger budget surpluses from 2003 onwards when the China boom kicked in. But there was always a political temptation of the Howard Government followed by the Rudd and Gillard Governments to win political popularity by spending the revenue from the mining boom. An SWF would have made it much easier to persuade Australians that we needed to save for the future and invest in key infrastructure. We showed that in our political support for the Disability Scheme. We were willing to pay the tax levy for the scheme because we agreed with the objectives of the scheme.
The mining boom produced enormous profits for the mining industry. The industry squandered a great deal of it in foolish investments and wage increases that flowed through to other parts of the economy. The miners acted as if they were playing with monopoly money. Rio Tinto alone had to write off $35 billion in failed investments. Its business management in China was a debacle. With so much money flowing through its hands it lost any sense of rigor and discipline. Just imagine what the Institute of Public Affairs and its bulletin board the Australian Financial Review would say if any government in Australia lost money on such a grand scale.
In addition to their foolish investments, they paid extremely high wage rates to attract skilled staff to the mining areas. In the five years to June 2013 hourly rates of pay in the mining sector increased by 24%, excluding bonuses. These pace-setting wages dragged up wages in other sectors – manufacturing up 17%, construction up 20% and retail trade up 16%.
With so much income flushing through the mining companies a Resources Super Profits Tax (RSPT) would have helped average out mining company profits with high taxes in boom times and lower taxes during periods of lower prices. Paul Keating would have called it an automatic stabiliser. It was just what we needed in terms of equity in sharing the benefits of the mining boom, but it was also desirable for good economic management to slow down the boom and force companies to be more realistic about spending “monopoly” money. The RSPT would have better secured our future, bringing the budget into surplus much earlier. We also know that taxing profits is a better means of raising revenue than through royalties based on production.
We also know that the Rudd/Gillard Governments made a political mess of the RSPT.And in taking advantage of this mess the Coalition sided with the powerful mining lobby which was very good at engineering and protection of its narrow interests but not very good in prudent investments for the future.
There is a painful adjustment ahead. We should make sure we learn from the failures of our last squandered mining boom.