Thursday, 25 October 2012

MYEFO & the MRRT

MYEFO was released on Monday.

The Government has foolishly locked itself into producing a budget surplus. ( Economists would regard a surplus of less than 1% of GDP as a balanced budget.)

Having said this I am glad it has used accounting tricks, smokes and mirrors etc both in the budget and in MYEFO. You really do not need to detract more than just over 3/4 of a percentage point from GDP at present.

Think for a moment if the Government produced a fearful budget that detracted say 2 pecentage points from annual growth. the RBA for one would be nervous having to reduce interest rates to well below 3% to compensate.

At present our bonds are being bought up big time by overseas buyers , particularly central banks, because we have a sound economy and our rates are, naturally, higher than elsewhere. This is outweighing the fall in commodity prices thus the exchange rate hasn't fallen like it has in the past. This has a contractionary effect on our economy.

It  appears the MRRT brought in no money in the first quarter it started. Given the fall in commodity prices this is not surprising. Afterall it is a tax on super-profits. No super-profits then no revenue.

Will it produce revenue? It will if the Chinese economy starts growing at its normal levels again.  It appears to have bottomed at present so this may eventuate.

Postscript.

I forgot about one of the major if not the major point for the budget. Whereas real GDP growth is above trend. Nominal GDP growth is below trend at present. Hence the low tax as a % of GDP levels we have seen post GFC. They have been  21.8% , 20.3%, 20.1% and 21.1%.

You have to go back to the first two years of the previous government to see such low levels. If only Wayne Swan had the tax levels of Peter Costello he would be rolling in surpluses.


In regards to the MRRT it appears most State governments think all mining companies wil have to pay the MRRT and so have the royalties claimed against liabilities however only a very small number will.

wow.