Swan May Prove Optimistic on Resource Tax's Growth Impact, Analysts Say

Australian government plans to reduce corporate taxes and overhaul resource-industry duties may have less of an impact on economic growth than the 0.7 percent gain claimed by Treasurer Wayne Swan, according to analysts.

“These changes shouldn’t have a material impact on the economy in the short term,” as many of the measures don’t commence until 2012-13, according to Macquarie Group Ltd. economists Richard Gibbs and Brian Redican in Sydney.

Prime Minister Kevin Rudd and Swan yesterday unveiled changes to Australia’s taxation system aimed at increasing government revenue from a mining boom fueled by demand from China. Resource companies said a proposed new tax will “kill the golden goose” and damage an industry that accounts for a 10th of Australia’s A$1.2 trillion ($1.1 trillion) economy.

The government will lower the company tax rate to 28 percent by mid-2014 from 30 percent, boosting long-run gross domestic product by 0.4 percent, the Treasury said in a statement in Canberra yesterday. Resource tax changes, including a 40 percent levy on profits, will add a further 0.3 percent to GDP growth, it said.

“In terms of the near-term economic outlook, it’ll only have an effect if people believe it discourages new mining projects,” said Bill Evans, chief economist at Westpac Banking Corp. in Sydney. “I’d be doubtful of that because a lot of the newer projects, such as in liquefied natural gas, are already attracting 40 percent tax.

Photographer: Andrew Harrer/Bloomberg

Wayne Swan, Australia's treasurer, walks to the Development Committee meeting of the IMF-World Bank spring meetings in Washington, last week. Close

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Photographer: Andrew Harrer/Bloomberg

Wayne Swan, Australia's treasurer, walks to the Development Committee meeting of the IMF-World Bank spring meetings in Washington, last week.

“They are obviously projects that can overturn those return hurdles,” Evans said. “I don’t think it’ll affect the economic outlook at all.”

Shares Decline

Still, shares of BHP Billiton Ltd. and Rio Tinto Group declined in Sydney trading on concern the government’s plans will cut billions of dollars from profits.

BHP dropped as much as 4.5 percent and Rio declined as much as 6 percent after Australia announced the so-called super tax yesterday. BHP traded 2.9 percent lower at A$39.59 at 2:58 p.m. in Sydney. Rio fell 3.6 percent to A$69.53.

“There are dangers in our view in basing the tax reform strategy around extracting more revenue from the mining sector,” said Paul Brennan, senior economist at Citigroup Inc. in Sydney. “The motivating objective of tax reform should be to reform distortions created by the tax system which lead to poor saving and investment decisions.”

Treasurer Swan said the state royalties currently imposed on mining companies were “outdated.”

‘Fair Share’

“It certainly did not extract for the Australian people a fair share of those very big profits that are coming through on the back of the mining boom,” Swan said in an interview today with Bloomberg Television.

The government’s proposed tax changes are also expected to increase investment by 2.1 percent more than estimates and boost employment by as much as 0.1 percent in the long run, according to modeling conducted for Treasury by KPMG Econtech. The statement didn’t provide a more definitive time period.

“Stronger mining investment is the key factor supporting Australian economic growth over 2010-11,” said Macquarie’s Gibbs and Redican. “If that additional mining investment is now put on hold -- even temporarily -- then it would create a massive hole in the growth outlook.”

Australia’s economy, one of the few to skirt last year’s recession, is picking up speed due to strong demand from China and India for the nation’s natural resources. That’s stoking investment in projects such as Chevron Corp.’s A$43 billion Gorgon liquefied natural gas venture in Western Australia.

Chinese Demand

“If China’s demand remains robust, I suspect a big chunk of this tax hike will eventually pass onto the customers of commodities,” said Tao Dong, chief regional economist at Credit Suisse Group AG in Hong Kong today. “Australia may lose some competitiveness” and China may seek to import more iron ore from Brazil, Tao said.

The International Monetary Fund last month said it expects Australia’s economic growth to accelerate to 3.5 percent in 2011 from 3 percent this year. Stronger growth is driving the Australian dollar higher, with the currency advancing 27 percent in the past year.

The Reserve Bank of Australia has increased its benchmark interest rate five times in six meetings and is expected to raise the overnight cash rate target to 4.5 percent from 4.25 percent tomorrow, according to 18 of 24 economists in a Bloomberg News survey.

‘Bitterly Disappointed’

Executives from Australia’s mining industry, which employs more than 300,000 people, said the government plan to impose a 40 percent tax on mining profits would have a damaging impact.

BHP Billiton, the world’s largest mining company, said a new resources tax will increase its effective tax rate to 57 percent from 2013 from about 47 percent now.

Macarthur Coal Ltd., the No. 1 producer of pulverized coal, said it was “bitterly disappointed” with the proposal. The increased tax will slow the company’s growth, Macarthur Chairman Keith de Lacy said in a telephone interview yesterday.

Minara Resources Ltd., Australia’s second-biggest nickel producer, described the new regime as a “super” tax that could “kill the golden goose.”

“The fact that the mining companies are reacting adversely is something that will worry the markets,” said Citigroup’s Brennan. “You’d have it give it a cross rather than a tick.”

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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