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As commodity prices plunge, Asia struggles to adjust

As commodity prices plunge, Asia struggles to adjust
Published 30 Sep 2015 

The economic debate in Australia is dominated by the impact of the unwinding of the commodities 'super-cycle'. Australia is having to adjust to substantially worse terms-of-trade (the price of what we export compared with the price of our imports), the slowing of the spectacular resources investment boom and reduced fiscal revenues from resources.

Australia is not, however, the only country which has to undergo this adjustment. In fact, our fiscal dependence on resources is quite low by global standards. It's hard to see on this crowded graph, but Australia is eighth from the right, with less than 5% of budget revenue coming from resources during 2000-2011, according to these IMF figures.

This analysis was delivered at a conference in Jakarta, where Indonesia is fumbling to sort out the mess of its mining legislation. The focus was on our neighbours, with regional data presented in this more legible graph: [fold]

The extreme cases here (Brunei and East Timor) have such huge oil revenue that the current lower prices won't affect budgetary expenditure much in the near future. Timor is accumulating substantial oil revenue in its sovereign wealth fund, rather than spending it all in the budget. But for the other five, the fall in revenue will be painful and immediate.

Indonesia, for example, improved its budget position by cutting petroleum subsidies last year. But lower commodity prices are offsetting much of this improvement. Indonesia also has some self-inflicted challenges. Current Indonesian legislation requires mineral exporters to process ore domestically, which is discouraging investment. The objective sounds reasonable enough: to shift from a simple focus on resource revenues towards a new objective of boosting the wider economy. But this is an illusion. The better way to think about this issue is to see the processing requirement as an imposition, like a tax: if Indonesia didn't impose this obligation, it would be able to collect more mining revenue. This lost revenue is being directed into what are probably low-return investments in ore processing, rather than being available for higher priority budget expenditures, such as infrastructure.

For Australia, there are other elements in this painful adjustment: adaptation to the ending of the investment boom and the lower terms-of-trade. The lower resource revenue requires a policy response, and the IMF argues that a resources-rent tax should be a key element of tax strategy. This is not only a matter of equity: a tax which varies with the commodity cycle would greatly assist macro-economic management.

The resources-rent tax proposed by Kevin Rudd was so complex and confusing that the mining industry pulled off the greatest public-relations coup of all times (combined with political ineptitude of a high order), with super-rich miners winning the debate. The proposed tax was reduced by Julia Gillard and even this tiny vestige was abolished by the Abbott Government. That's not the only reason why Australians now find themselves with an inadequate tax take, but abolishing a tax, no matter how rhetorically attractive, has to be made up by other taxes sooner or later.

There is talk that all elements of taxation will be on the table under Australia's new leadership. Is this one included? Low commodity prices provide the best environment to introduce a super-profits resource-rent tax, because profits are not super in this phase of the cycle, and resistance may not be so fierce. Once in place, the tax is ready to help manage the next upswing, whenever it comes.

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