The surge in prices for Australia’s exports may help both the budget revenue and Australian incomes, but amid uncertainty about how long the recovery will last, the price spike highlights how foolish it was of the Abbott government to axe the minerals resources rent tax when it did.
As I noted last year, when it comes to being a treasurer, it’s better to be lucky than good. Despite what all governments would have you believe, there is a massive degree of luck involved with our country’s finances. Life is generally easier when exports prices are rising, and that is something over which no treasurer has any control.
Last December’s mid-year fiscal and economic outlook showed the budget balance mostly keeping in line with the expectations in the May budget.
This was due overwhelmingly to three things – the first was a $7.6bn reduction in the expected amount to be spent on childcare rebates over the next four years. The second was the $2.1bn revenue expected to be recovered via the government data matching of welfare recipients income records. And the third was the improvement in the price for exports of iron ore and coal.
The first of these is not really a saving. It is a bit like planning a wedding for 200 people and finding only 100 people RSVPd and being able to cut the catering bill in half. Nothing the government did caused less money to be spent, it just recalculated how many people they expect to access childcare rebates over the next four years.
The second measure is not a saving either but, as we have seen this year, is closer to a mail scam. Whether the government will actually raise $2.1bn remains doubtful, but to get their they would be hoping their strike rate is better than what now appears to be the case.
But on the issue of export prices, the government looks to be doing well.
Last Friday the latest export and import price index figures recorded the biggest quarterly increase in exports prices for six years:
The 12.4% increase was driven mostly by a 25% jump in the price of mining exports, and that was in turn driven mostly by a 60% explosion in the price of coal.
It meant that over the past year the price of Australia’s exports have increased by 12.4% – the first time since March 2014 that they have been higher than they were a year previous:
In our relatively small open economy, export prices absolutely dominate our fortunes. Import prices – despite fluctuations in the price of oil – are relatively flat. A look at the import and export prices over the past 25 years shows barely any change in the overall prices of imports, but our exports have at times boomed, and then collapsed – and with them so too have our national incomes and our budget balances:
This price surge in coal and iron ore helps our budget balance as that price flows through into revenue for mining companies and thus hopefully profits which lead to increased company tax revenue.
The Treasury also deserves credit that it has not banked the current export prices. While the May budget anticipated iron ore prices at US$55 a tonne, the Myefo estimated them at US$68 a tonne. The standard process to arrive at this figure is to use the average of the four weeks preceding the Myefo (or budget).
In the past that figure has then been used to estimate revenue for the next four years – an absurd proposition, really. This time round the government to its credit has been much more cautious and estimated that the US$68 a tonne price will decline to US$55 a tonne by September. Similarly they assume coal prices will fall from US$200 a tonne to US$120 a tonne by March next year.
As it is those estimations may turn out to be overly pessimistic. Iron ore prices are now around the US$80 a tonne mark, and coal, despite some slippage, has held up pretty well.
What has also held is the value of our dollar. One thing that cruelled Wayne Swan’s budgets despite increases in export prices in 2010 was our dollar rising in value along with those prices.
A higher value of our dollar means companies get fewer Australian dollars for every US dollar (which is the standard currency for commodities).
When the value of our currency is US$0.70, one US dollar will get you A$1.42, but if the value of our currency rises to US$0.85, every US dollar only gets you A$1.18.
It’s why a rising value of our dollar is not good for international tourism because tourists’ foreign money gets them fewer Australian dollars to spend here.
Similarly a higher currency gives Australian producers fewer Australian dollars for things they sell in US dollars, and that flows through into less company tax revenue.
But while the price of our exports has risen in the past year, the value of our currency has stayed pretty flat:
This has meant the price of commodities like iron ore has actually improved slightly better in Australian dollar terms than in that of US dollars:
And while it is hoped this might flow into increased company tax revenue, the current picture only serves to reinforce how lamentable it is that we no longer have the minerals resources rent tax.
One reason the tax did not raise as much revenue as hoped when introduced in 2012 was it came in at the height of the market. It was a tax designed to take advantage of rising prices, and yet it existed in a period when prices were falling.
The Abbott government ditched the tax in September 2014, and since then the price of bulk commodities (iron ore and coal) have risen by 38%:
Essentially the MRRT was a case of the government buying high and selling low.
Getting rid of it did nothing to impact on iron ore or coal prices. All it did do was remove revenue that could have improved the budget balance at a time when Scott Morrison is sweating buckets that we might lose our AAA credit rating.
The political benefit of axing the MRRT was minute and short-lived; the budgetary legacy will be much larger and longer.
