Wayne Swan will be forced to make savage cuts to his May budget after confidential Treasury figures showed a $13 billion fall in economic growth for this financial year….That weaker outlook will put further pressure on Mr Swan to find budget cuts with immediate effect to offset revenue losses that will be felt in 2011-12.

Peter Martin is an experienced economic journalist. Unless some particularly ignorant subeditor has butchered his work, what he should have said was:

In an effort to meet a largely meaningless, arbitrary numerical target that was one of the stupider promises in an election campaign that consisted almost entirely of stupid promises, Wayne Swan has chosen to implement spending cuts that will if anything exacerbate a slowing economy rather than add slightly to Australia’s net government debt. This debt, the year-to-year additions or subtractions from which are not particularly significant (in contrast to the long-term trends, which are), is in any case miniscule by world standards. Mr Swan has also, for no particularly good reason, chosen spending cuts rather than additional revenue raising measures, which would also have been a perfectly reasonable way to bring the budget back into balance if it were actually necessary in the short term. Which it isn’t.

Reading the piece, I was reminded of Mark’s point yesterday:

It’s all interlinked. The professionalisation of politics rests on the existence of career paths which take major party members from staffer to Member to lobbyist, or straight from staffer to lobbyist. “Government relations” or “public affairs” staff grease the wheels which are further oiled through donations, and the existence of Labor or Coalition aligned consultants, think tanks, economic advisors, law firms and so on. The media uncritically reports a host of advocacy research, done only because it provides talking points intended to influence the policy process through both personal contact and framing public debate. And so it goes on, making a mockery of both evidence based policy and the public interest.

Peter Martin thinks he’s thrown away his chance at the Prime Ministership.

This is, of course, the only logical outcome of a risible policy performance during the campaign, where back of the envelope polices were the order of the day, where announcements were illogical, sketchy and constantly changing, and where the Coalition did everything possible to avoid any scrutiny of either the costs of their billion dollar a day promises or their dodgy “savings”.

No doubt Tony thought that he could pull the usual trick of claiming that the situation was worse than anticipated, and quickly relegating everything offered to the “non-core” basket, and embarking on a new round of nasty spending cuts.

But now his chickens are coming home to roost.

Elsewhere: Grog’s Gamut.

On the substance, such as it is, Peter Martin has it covered.

Possum’s post is here.

Peter Martin has picked out some highlights:

“In 2008/09, the Australian mining industry had a EBITDA/Revenue ratio of 43% while the world’s largest forty mining companies had a comparable estimate of 30%…”

“Our profits and our resources are simply too good an opportunity to pass up – even if the profit margins involved in Australia are seriously reduced. When the noisy miners say that their capital is mobile, they are dead right – their capital is indeed mobile, but in exactly the same way that every other mining firm’s capital is mobile, including the capital of the worlds largest forty miners…”

“Big Dirt walking away from Australian investment will be their loss, not ours – because someone else will simply take their place.

Big Dirt – welcome to capitalism.”

Update: Possum has published part two of his post today.

SARAH FERGUSON (to Wayne Swan): The Minerals Council is arguing, as are major players in the industry, that they’ll be facing a 58 per cent tax as a result of this change?

WAYNE SWAN: Well, well there is not a 58 cent in the dollar uniform rate at all. And I’ve just explained the reasons for that, because…

SARAH FERGUSON (to Wayne Swan): But there will be some, there will be some projects that are paying 58 per cent?

WAYNE SWAN: Well there would be some super profitable companies that could reach that level.

SARAH FERGUSON (to Wayne Swan): But at 58 per cent, the Australian mining industry would not be competitive with projects in South America, even in Africa.

WAYNE SWAN: I completely reject that, I completely reject that. If projects are super profitable, they will be very, very attractive. Very, very attractive.

Now there have been full-page advertisements in the press quoting Swan as saying resource companies could pay up to 58 per cent. But it’s actually extremely unlikely. For this to happen according to an article in yesterday’s Australian Financial Review by John Kehoe you would need a “return on capital” of over 50%. One mining source said:

“If you found a project that is giving you 50 per cent [return], you must have fallen over a very high-quality mine that sat next to a port where there were no risks, low costs, a friendly railway and beautiful dirt to dig up.”

Kehoe reprints a table you can find at Peter Martin’s blog. It’s a bit difficult at the moment for me to do a screen shot and bring it to you here. The wonderful tigtog has given me a path to run down, but I’ll need time. So I’ve replicated the essential information below. All quantities are percentages.

Profitability_________Old tax_________New tax

____6______________45.4____________28.0

___10______________40.9____________39.5

___15______________38.7____________45.3

___20______________37.6____________48.2

___25______________36.9____________49.9

___50______________35.5____________53.3

So at less than 10% companies pay less under the new scheme. The other point that needs to be made is that the Government bears 40% of the risk. Where the project is unsuccessful the Government would be paying the companies. Under existing arrangements the companies still need to pay royalties on unprofitable projects.

Kehoe reports mining sources as saying that “the typical rate of return is between 15 per cent and 20 per cent.” It seems to me that Government advertising could focus on the benefits to companies for the 7-11 % extra they pay as well as the benefits to the rest of us.

Kehoe does say that Treasury have found that some projects have a pay back period of six months and “rates of return of more than 400 per cent.” Not bad work if you can get it!

It seems, however, that companies simply do not believe that they would ever be paid for failed projects. My present opinion for what it’s worth (and given my accounting (il)literacy that may not be much) is that the Government should scrap that aspect of the scheme. However, I’m attracted to the notion of a progressive taxation scheme related to profitability and would look at being generous at the lower end.

A few years ago I seem to remember Brian Toohey advocating the elimination of company tax entirely. I wouldn’t go that far, but I consider it reasonable that an entrepreneur be rewarded for not just putting the money in the bank or buying government bonds. So for the mining industry I’d look at zero company tax up to 6% and no royalties. After that tax-free threshold I’d charge company tax on the margin between 6 and 10% and then have a progressive additional rate cut in at that point. This gives recognition to the fact that the minerals have to be found and the risks involved when developmental expenditures have to be outlayed well in advance of any returns when market conditions are an unknown.

But in return for this you would need to revisit subsidies, such as the diesel fuel rebate and perhaps incentives for exploration if there are any.

At this point I need to raise the issue of definitions. I’m hoping that some kind accountant or economist will clarify. I’m told that AFR journalists don’t always get the jargon right.

“Profitability” in the table above is short for “rate of return” used by Kehoe and the table at Martin’s place. I think this is different from “return on capital”.

In the CommSec research there is a ratio “net profit margin” given for the construction company Leighton Holdings. This is net profit before abnormals/revenues and comes out at 4.6%. For Woolworths it is 3.7%. But the “return on capital” for both is 21% and 20% respectively. If you taxed them on that you’d kill them.

Pointless to look up BHP Billiton, Rio and Woodside because the “financials” category is bare in each case. Nevertheless I suspect that “rate of return” means what you have left over compared to what you have spent including the cost of capital, whatever that means.

While over at Peter Martin’s place I noticed he has many posts on the RSPT.

His latest “Resource companies will leave Australia only when there are no more minerals and energy to extract” is a reprint of Ian Verrender’s article in the SMH.

But raising the rent for a bunch of tenants profiteering on the back of resources they do not own does not increase sovereign risk. It is simply an owner exercising ownership rights…

The article is mainly about the misuse of the term “sovereign risk” but it also challenges the myth of retrospectivity.

Amongst the rest the following were eye-catching:

Five easy pieces – the Mining Super Profits Tax

Three of the best things written about the Resource Super Profits Tax

It appears that there may be developments in the wind on negotiations on the RSPT. Michelle Grattan said on Breakfast this morning that there is a lot of talk in the air.

Terry McCrann, bless him, says that they are going to put the coal seam gas industry on the same basis as the existing Petroleum Resource Rent Tax (PRRT). Also:

The Government is going to dump the 40 per cent underwriting of losses and lift the threshold profit rate at which the tax kicks in from the long-term bond rate of around 6 per cent to something above 10 per cent.

Interesting, but whether that would pacify the mining bosses is questionable. They seem intent in killing it off completely.

Appearing before a Senate estimates committee Treasury official David Gruen said if the stimulus was stopped it could “stall the economy”…

Coalition frontbencher Barnaby Joyce had asked why stimulus programs were continuing even though the financial crisis was over.

Dr Gruen replied that they were being withdrawn after keeping the economy afloat by creating almost all of last year’s economic growth.

The phased withdrawal should subtract 1 percentage point from economic growth this year.

“You could argue that you would like to see an even bigger turnaround. I think if you make it big enough you will stall the economy,” he told Senator Joyce.

“That’s the reason for wanting to do this at a measured pace.”

Business investment slipped 2.9 per cent in the quarter in part because of the withdrawal of the investment tax break that expired in December. Private housing investment slid 1 per cent in part because of the First Home Owners Boost. Without the remaining stimulus spending on construction at schools and public housing and health facilities the economy would have shrunk 0.2 per cent.

“In this limited arithmetic sense increased government spending has accounted for more than all of the growth in GDP,” said BT Group economist Chris Caton. “It underscores the point that stimulus has kept the economy afloat.”

There’s an obvious contradiction here with the claim from the Opposition and the mining industry about the contribution of the latter to our avoidance of recession.

There’s also a clear implication that if the Liberals’ attitude towards stimulus spending prevailed, the economy would tank.

The Coalition has been seeking to use its new found role as the political wing of the mining industry to highlight its so-called credentials on economic management. But we are still completely at a loss to understand what their approach to macro-economic policy would be, given that such statements as do emerge deny the facts. Nor are the media putting the question.

We need to examine the Opposition’s bona fides much more forensically, and to recognise that their stewardship of the Australian economy would be disastrous, on the basis of their own statements.

Hockey didn’t get off to a good start on Monday night on Q&A, when he repeatedly appeared not to understand that a reduction in small business tax rates is not “spending”. Will he be able to get by without any clangers? Will he actually say anything substantive?

This is an open thread for instant commentary, reaction, links and analysis.

Update [by Kim]: Hockey avoided questions on detail by flicking a pass to Andrew Robb, though he did sack Ken Henry in response to one question.

Peter Martin has posted the Coalition’s list of savings, for what they’re worth, which probably isn’t much.