April 14th 2012

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Articles from this issue:

EDITORIAL: Swan's budget black hole paints Labor into a corner

CANBERRA OBSERVED: Can Wayne Swan really deliver a budget surplus?

ENERGY: High electricity prices to soar: study

CLIMATE: CO2 not driving global warming: Princeton professor

NATIONAL AFFAIRS: Anti-coal campaign gets underway in Queensland


ECONOMIC AFFAIRS: How long before Australia succumbs to world debt crisis?

EUROPE: The crisis of the European Union: causes and significance

DIVORCE LAWS: Family Court loathed for the vast harm it does

POLITICS: Dr Leslie Cannold's radical agenda

UNITED NATIONS: UN may recognise sex rights of 10-year-old children

SOCIETY: New strategies for winning the abortion wars


CINEMA: Birth of cinema seen through a child's eyes

BOOK REVIEW "Big Bill" Baillieu's business prowess

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Swan's budget black hole paints Labor into a corner

by Peter Westmore

News Weekly, April 14, 2012

The latest Treasury estimates that the federal budget deficit for the current financial year will rise to over $40 billion — instead of the $22.6 billion forecast in the federal budget less than a year ago — raise fundamental questions about the government’s credibility, adding to concerns that it cannot be believed when it promises to bring the budget back into surplus next year.

In an address to the country’s business economists, the federal Treasurer, Wayne Swan, insisted that he would get the budget back into surplus next year, and implied that the mining industry is firmly in his sights.

He said: “As we know, mining pays a relatively low rate of company tax compared to its share of the economy. Mining companies currently account for about 30 per cent of corporate gross operating profits, but only around 15 per cent of corporate tax receipts.

“Tax receipts from the industry are affected by high depreciation deductions, reflecting the rate of investment in the industry. What this means is that growth in the mining share of corporate Australia keeps the tax-to-GDP ratio down. And our massive pipeline of investment means that the tax deductions available to the mining sector are historically high, and depreciation deductions are already trending up … and will accelerate over the next 5 years. This unprecedented level of investment will increase deductions in this sector for many years to come.”

In other words, apart from imposing its new mining and carbon taxes, the Federal Government is looking at other ways of getting the mining industry to bankroll its deficit.

The Australian (March 31, 2012) suggested that this would include abolishing the diesel fuel rebate for miners, and removing accelerated depreciation allowances on capital investment which the Treasurer said “is expected to reach a staggering $173 billion in 2012-13”.

Mr Swan’s tax strategy is based on the assumption that the mining industry will be as profitable next year as it has been in the past. It ignores the impact of his mining tax, the carbon tax and the European debt crisis, each of which will hit the mining industry hard.

To the extent that his budget strategy is based on increasing the tax rate on businesses, it will also hit Australian manufacturers, which are struggling to survive in the context of cheap imports and reduced exports fuelled by the high Australian dollar, the reluctance of consumers to spend, and dwindling profitability.

These concerns were forcefully expressed by David Murray, the retiring head of the Future Fund and former CEO of the Commonwealth Bank, who described the carbon tax as “the worst piece of economic reform I have ever seen in my life in this country”.

Speaking on ABC’s Radio National, he said, “The consequence of introducing that tax at that level in Australia today is very, very bad for this economy, particularly in terms of its international competitiveness.

“It raises costs further within Australia, it reduces our competitiveness for export of energy-related commodities, and it therefore renders us less competitive in the future.”

All this is likely to damage confidence and exacerbate unemployment.

In his speech to the business economists referred to above, Mr Swan also indicated that in preparing for the next Budget, the Federal Government needed “to find even more substantial savings in the Budget than we had earlier anticipated”.

However, he indicated that certain areas would be quarantined from cuts and anticipated that the Government would “increase spending on important things like education, frontline health services and jobs”.

This suggests that substantial areas of government expenditure are at risk — such as defence procurement, where both the Navy and the Air Force are currently considering multi-billion acquisitions. These would be needed to maintain existing service capabilities, as well as to meet the challenge of emerging powers such as China in the Pacific Ocean, the extreme vulnerability of the massive oil and gas platforms in the Timor Sea, and the continuing problem of asylum-seekers arriving from Indonesia.

While much of the expensive defence hardware is bought off-shore, governments have always tried to maximise domestic manufacturing, either through sub-contracting or offset agreements with overseas suppliers. These are at risk if defence spending is cut back.

Cuts in defence expenditure are not only short-sighted from a strategic point of view, they will also damage key parts of Australia’s manufacturing industry.

There is an increasing risk that the Gillard Government’s self-imposed deadline to bring the budget back into surplus could trigger the collapse in business and consumer confidence which the government says it must avoid.

If that were to happen, Australia would become even more dependent on the mining sector, which is increasingly regarded by the government as a “soft target” in its desperate effort to create a nominal budget surplus in May.

Peter Westmore is national president of the National Civic Council.

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