Sydney, 6 July 2010

Australia's government came under political attack on Tuesday over a potential A$4.5 billion ($3.8 billion) loss in revenue from a new mine tax, months before elections in which economic management will be a major issue. But economists said the new tax structure would only kick off in 2012 and it was too early to make a precise estimate of the revenue. Growth in China, which is Australia's biggest importer of minerals, was another variable. The Labor government said it would lose only A$1.5 billion in revenue from a watered down mine tax it announced last Friday to end a bitter row with global miners such as BHP Billiton , Rio Tinto and Xstrata. The latest mine tax controversy started after Teasury Secretary Ken Henry said on Monday night that the lost revenue estimate was based on higher commodity forecasts than in the original "super profits" tax which was to reap A$12 billion to fund various commitments including infrastructure projects.

Commodity forecasts for the new mine tax were raised based on recent increases in iron ore and coal prices, he said. "I am aware that the price increases were quite significant," local media quoted Henry telling a Senate Committee on Monday.

Coal and iron ore are Australia's top two exports, accounting for over a quarter of last year's A$250 billion export revenue. Their share is expected to rise this year as commodity prices soar and export volumes rise. Henry's revelation sparked conservative opposition criticism that the government's economic credentials were not sound.

"There has been a misstatement of a magnitude of three times by the government of the effect of these (tax) changes," Liberal Senator George Brandis told local television on Tuesday.

Brandis said the country stood to lose $4.5 billion from the new tax regime based on the evidence provided by Henry, instead of A$1.5 billion the government originally said. Economic management is traditionally a major election issue in Australia and new Prime Minister Julia Gillard is trying to salvage voter support ahead of expected August elections. Labor is on course for only a narrow victory.

China, India Underpin Australia

Economists dismissed the political attacks, saying the new mine tax still had to be passed into law by the next parliament and projected revenue was not due to start until 2012.

"Talking about revenue estimates two years from now, a lot can change in that space of time," said Craig James, chief economist at CommSec. James also said that treasury estimates were traditionally conservative and that Asian economic growth, particularly in India and China, would underpin Australia's economic growth.

"The focus nowdays is Asia and emerging nations, rather than developed nations. The China story and India story is very much in its infancy," said James. Australia's trade surplus swelled to the third highest on record in May as exports of gold, wheat and coal all surged, a dramatic turnaround that should help insulate domestic growth from headwinds in the global economy.

Greens Senator Bob Brown, whose party is expected to control the next upper house Senate, said he would demand parliament review the financial details of the new mine tax, flagging changes to the tax. "It is not my intention to block it but to make it better," Brown told local television.

New Mine Tax to Spur Investment - Deloitte

After a three month fight with miners, which saw voters desert the Labor government fearing the tax would threaten jobs and jeopardise the economy, Gillard caved in and cut the tax rate to 30 percent from 40 percent and raised the trigger point. The government said the watered down tax and less revenue would not impact on the forecasts for a budget surplus by 2013.

"If anything we think we are likely to see the budget come into surplus perhaps a fair bit ahead of the time period," said CommSec's James, citing rising commodity prices, local economic growth and growing employment.

"Overall, once we get through this choppiness in terms of U.S. and Europe growth, I think looking into 2011 and 2012 are going to be very good years for the global economy," he said. The original "super profits" tax had threatened more than $20 billion in investment, said miners, but no major project were scrapped and several advanced after it was unveiled on May 2.

Rio, which along with BHP and Xstrata signed off on the new mine tax with the government, said on Tuesday that Australia remained among the highest resource tax regimes in the world and that the new tax needed deeper examination before it commits to further iron ore expansion in Australia.

"We're in the process of reopening our study in relation to the Pilbara expansion," Rio's iron ore division head Sam Walsh told reporters in Perth. Rio has a production target of 330 million tonnes in 2015, up from 230 million this year.

But accounting firm Deloitte said on Tuesday te new minerals resource rent tax will remove the uncertainty surrounding resource investment and boost expansion and M&As.

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