One of the maxims of fiscal policy is that when a government is on the hunt for revenue, weird and unexpected things can happen. Everyone had better be wary, but especially large businesses that report large absolute profits.
This maxim was demonstrated in the recent federal budget, and it is being demonstrated again now in Western Australia, where the new Labor government wants – and is going to ‘ask’ – BHP and Rio Tinto to bring forward a number of years’ (30 is suggested) payment of the longstanding 25 cents-per-tonne iron ore lease rental fee.
This fee currently amounts to around $150 million a year for the two big Pilbara miners, and is overshadowed by much larger annual royalty payments. But pulling forward many years’ fee payments could result in a multi-billion dollar sum.
The new government’s proposal evolved from a campaign before the March election by the then Nationals leader Brendan Grylls for a 20-fold increase in the fee. The WA Premier at the time, Colin Barnett, suggested instead the miners could pay an up-front lump sum to buy out all future lease rental fee payments. The Labor opposition rightly opposed any forced change to the rental fee agreement, Grylls lost his seat, Labor won the election, and the big miners breathed a sigh of relief.
But it seems the idea of extracting more revenue (or at least more today) from big mining companies just won’t go away. It will be fascinating to see what happens when they say ‘no’ or counter with an offer the government finds unattractive. The WA proposal is another example of the increased sovereign risk being faced by businesses operating in Australia.
One can sympathise with the WA government for its currently very low share of GST revenue, but the hole it is in is also a result of successive WA governments having for years spent up as if there was no tomorrow. Operating expenses more than doubled in the 10 years to 2013-14 and capital expenditure quadrupled. Even when revenue was at its strongest in 2013-14, the government ran a hefty cash deficit and only a modest net operating surplus.
Having now discovered there is a tomorrow, this government wants to bring forward revenue from tomorrow to make today’s budgeting easier. This would just make this year’s budget look better at the expense of future budgets. It might make sense if there were very good reasons to expect future years’ budgets to be much stronger, but no government can afford the comfort of that assumption. Even if they could, rather than bring forward revenue the government could just borrow more today — knowing it could easily service the extra debt — and do so more cheaply than mining companies.
BHP and Rio Tinto can assess the bring-forward as they would any other proposed use of capital. In doing so, they would apply to the stream of future payments a discount rate that reflects the risk characteristics of those payments. One of the risks (or near certainties) the miners face is that a future government will forget 30 years’ payments were brought forward and will come back for more mining revenue in the same or a different form well before the 30 years are up.
After discounting, the present value of 30 years’ future payments is unlikely to be attractive to the state government. If it wants the miners to use an artificially low discount rate, that would amount to a tax. As an alternative to dealing with the miners, the government could try securitising the future revenue steam and selling it to investors for a lump sum. For that matter, it could try securitising any future revenue stream, but big miners — like big banks — are politically juicier targets. In any case, securitising a future revenue stream would be tantamount to borrowing.
Bringing forward revenue is not a good option. No amount of financial engineering can alter the fact that WA has a government expenditure and debt overhang from the excesses of the past. The new government has to carry the burden of adjusting bloated expenses to live within current revenue flows.
Robert Carling is a Senior Fellow at the Centre for Independent Studies.
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