We are the lucky country. In the words of our national anthem “we’ve golden soil and wealth for toil”.
As home to some of the world’s largest resource deposits and with a stable legal and regulatory environment, Australia enjoys a comparative economic advantage.
In recent decades this advantage has been seized, creating hundreds of new projects, thousands of new jobs and billions of dollars in export revenue.
In fact today, the resource sector is the largest single contributor to our nation’s corporate tax coffers and comprises 42 per cent of all export revenues.
But this steady growth trajectory in Australia’s most dynamic and important sector is now under serious threat from Kevin Rudd’s resource super profits tax.
While under this new tax regime, many existing projects may no longer be economic, there is an even more nefarious and long term consequence that is currently playing out and will impact negatively upon our future.
Up to now, the term sovereign risk has been conspicuously absent from the Australian lexicon. It was a concept conveniently confined to those resource rich but politically unstable regimes dotted through Central America, Africa and Asia.
But this is no longer the case. Kevin Rudd and Wayne Swan have thrown a cloak of uncertainty over the sector that is forcing corporate leaders to reconsider their plans for investment in Australia.
In the words of Rio Tinto’s Chief Executive, Tom Albanese “this is my number one sovereign risk issue on a global basis”, an alarming comment particularly when one considers that Rio operates in a host of diverse jurisdictions ranging from Namibia to Peru.
Not prepared to remain silent the leading global credit rating agency Moody’s has seen fit to draw parallels between Kevin Rudd’s super tax and changes to Zambia’s tax system in 2008 calling it a “cautionary tale” that “likewise upset foreign mining firms and was blamed for a reduction in mining exploration”.
One of the most damaging aspects of Labor’s new tax has been the lack of adequate industry consultation. There was no forewarning, no hint of what was to come. For investors this is equivalent to a back-hander using an iron rod.
Perusing Kevin Rudd’s 2007 pre-election manifesto titled “Labor’s Plan for a Stronger Resources Sector” leaves the reader none the wiser. While there are plenty of promises to meet the shortages of skilled labour, improve infrastructure and strengthen our mining communities, there is no mention of a great big new industry-wide tax.
If election mandates meant anything to the Labor Party, their new super profits tax would never get off the ground.
Passing judgment on the Rudd Government’s approach to this tax, Mick Davis, CEO of mining giant Xstrata said there was a “total absence of consultation... much more reminiscent of countries perennially trapped in a spiral of mercurial populist actions, followed inevitably by dwindling foreign investment and ever-poorer populations...”.
As the third biggest mining company operating in Australia, Xstrata’s view must count for something.
Labor just simply fails to understand that these major companies and their countless employees have an enormous amount at stake in planning their investments and have a right to be heard and not merely presented with a fait accompli.
What is more the Labor Government may find that from talking to business they will actually learn something.
This may help them to avoid the all too frequent spectacle of an unedifying and hasty policy backflip designed to rectify their original sin.
Make no mistake, Australia’s resource super profits tax has sent shockwaves through the world. Competitor nations such as resource rich Canada see the opportunity. As Canada’s Conservative Finance Minister, Jim Flaherty, recently made clear Australia’s loss is Canada’s gain.
The danger now for Australia is that the uncertainty that has taken root in the resources sector will undermine international investments in other parts of the Australian economy.
It is a concern raised by the President of the Business Council of Australia and shared by many of our leading equity analysts.
As the world’s ninth largest recipient of foreign direct investment, it is a development Australia can ill afford.
Successive Australian governments, of both political persuasions have spent decades building our country’s reputation as a preferred destination for investment.
This is now all at risk.
In one simple but massive policy miscalculation over the superprofits tax, the Rudd Government has simultaneously undermined domestic and international confidence.
Reputations take years to build but as Labor is proving once again, they can be destroyed in an instant.