Making Our Own Wealth

The Age

Thursday June 26, 2008

Martin Feil - Martin Feil is a tax and industry policy consultant and a former director of the Industries Assistance Commission

A resources bubble is not going to pay Australia's way in the long term.

THE news that revenue from iron ore sales will increase by more than 100% next year certainly makes a change for Australians tired of reading about debt and petrol prices. It would be easy for some to take the view that at last our economic future is assured. After all, the Australian Bureau of Agriculture and Resource Economics predicts an increase of $61 billion in exports earnings, driven mainly by coking coal and iron ore.

But there's more to the picture than gain. Over the past 20 years, a succession of current account deficits has left us with a foreign debt of more than $600 billion - a debt that will not be overcome by a resources bubble. To ensure long-term economic security, we need to add value to our exports before they go offshore and we need to import less. In short, we need to revive our manufacturing industry.

This is not as easy as it sounds. For too long we have neglected to make the most of opportunities to add value to our exports and many successful manufacturers have moved offshore, encouraged by lower labour costs and government incentives in countries such as Malaysia and Thailand. Overseas buyers and expatriates can then enter the Australian market without paying duty and take advantage of product acceptance and customer networks that may have been established over decades.

In Singapore, the Board of Trade was willing to match, dollar for dollar, the set-up costs incurred by high-tech manufacturers. Contrast this with Australia, where governments stopped courting manufacturers long ago. Yet it does not have to be this way.

Education and the creation of a mobile workforce alone cannot revive Australian manufacturing. It requires a sensible and economically responsible approach to our export industry.

For a start, we must stop exporting coal and iron ore for $1 and buying back the materials for $3 after they have been transformed into motor cars, white goods and fast-moving consumer products. Changing this cycle is the only way we will pay our own way in the long term.

Models for doing this abound in the developing world. As well as encouraging manufacturing, China and India both add value to their materials in their raw state - China imposes a duty of 8% on iron ore imports and India adds a 10% tax on iron ore exports. On the available evidence, it seems that the Chinese Government is collecting more taxation revenue for our exports than the Australian Taxation Office does.

Obviously mining output will increase, but our mining and energy boom needs to be tested against some cold-blooded standards that are real measures of growth in our economy. Such testing would be likely to show that very few Australians - aside from miners and captains of industry - will benefit from this boom.

It will be interesting to see just how much of the predicted export revenue actually ends up in Australia.

Mining is not a big employer. In Western Australia it employs about 50,000 people, while about 100,000 are employed in manufacturing and 150,000 in retail. To put this in context, the total industry employment - excluding gold and aluminium smelting, which actually adds value - is about half of 1% of our workforce of 10 million.

In fact, the overall benefit from mining is only a fraction of what it could be. Mining companies pay about $5 billion in tax and $2 billion in royalties. Mining industry profitability can be expected to increase as a consequence of the price windfall, and should be significant, given that the 2006-07 operating profit was already a staggering 32%. But many of mining's investors are based overseas and this reduces the amount of dividends spent in Australia. The situation could be exacerbated by the likely merger of BHP Billiton with Rio Tinto, which may result in a move of the global conglomerate to Europe.

In the past three years, despite our minerals boom, we have managed to rack up a current account deficit of more than $50 billion a year. We need to be exploiting the boom to reduce this - and we need to act quickly.

While the present euphoria emphasises that Australia's prosperity rests on the miner's back, these opportunities will not last forever and the Government should be ensuring both that the infrastructure - especially ports, railways and roads - is adequate and that there are incentives to add value to those resources, both through the taxation system and through encouraging manufacturing in this country.

The crucial difference between this boom and our historical ride on the sheep's back is that wool was not only a renewable resource but it could be increased over time.

Nobody wants to be unnecessarily pessimistic about the minerals boom, yet we cannot escape the reality that iron ore and coal, like fossil fuels, are finite commodities. The more we sell today, the less we will have tomorrow. Unlike wool, minerals certainly won't support our grandchildren. Surely it should be clear that it is time to make things in this country once again.

Martin Feil is a tax and industry policy consultant and a former director of the Industries Assistance Commission.

© 2008 The Age

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