Thursday, June 30, 2011

Brown's economic Xenophobia will cost us dearly

For a man who so warmly embraces every foreigner seeking asylum in Australia, Bob Brown is strangely xenophobic when it comes to foreigners who want to lend us money or invest here.

Yesterday, at the National Press Club, Brown did his best to stoke up anger against investors from ''Switzerland, London, Calcutta, Beijing'' and foreigners who, according to a study commissioned by the Greens and released yesterday, own 83 per cent of Australian mining companies.  It was not a pretty sight.

Economic debate in Australia will take a turn for the worse once the Greens hold the balance of power in the Senate.  Brown may have good intentions but he is economically illiterate.  That illiteracy is likely to cost ordinary Australians dearly;  many will lose their jobs and their standard of living is likely to fall.  It is surprising given their well-developed economic policies that the Greens have managed to avoid careful scrutiny of their party platform.  Their industry policy should worry many Australians.

The Greens have long run a campaign against the mining industry and particularly the coal industry.  In fact their stated party policy is no new coalmines and no expansion of existing mines.  They fully intend to close down the Australian coal industry.  Sooner rather than later.

Brown makes two arguments in defence of this policy.  First, that renewables would replace coal.  Second, that the Australian mining industry is largely foreign owned.  Presumably that means the Australian government can destroy foreign investments with impunity.

Economic illiterates make several mistakes in their analysis.  Because of his anti-foreign bias, Brown overlooks the benefits of interaction with foreigners.  Unfortunately, he is not alone in exhibiting ''capital xenophobia''.

Australia has long had to borrow money from the rest of the world to finance our economic prosperity.  The local economy has grown and foreign investors got their money back.  This arrangement has benefited everybody;  Australian savings are simply too small to finance our economic growth and standard of living.  Foreigners invest in those economies with good prospects and low levels of sovereign risk.

Australia has a good reputation as an investment destination.  But Brown is placing that hard-earned reputation at risk.  Suggestions by a major political party, in a formal partnership with government and holding the balance of power in the Senate, that foreign investment can be taxed with impunity, or even shut down, raises perceptions of sovereign risk.  What's worse, he is not alone.  The ill-fated resource super-profits tax also raised serious concerns about sovereign risk.

Remarkably, Brown admits that Australia gets ''jobs, export income, royalties and company tax'' from mining.  But that is not enough;  he wants it all.  He seems to object to foreigners, in return for their loans and investments, getting ''profits, dividends, [and] capital appreciation''.  There is also a bit of double counting going on;  dividends and capital appreciation amount to profits.  Or perhaps Brown doesn't know that.

Brown is worried that foreign investors will earn $265 billion from their Australian investments over the next five years and, of that, $50bn will leave the country and $205bn will be reinvested.

Putting those figures into context, the Australian Taxation Office reports for the 2008-09 financial year that the mining industry paid $13.3bn in corporate tax.  Of that amount coalmining paid nearly $3.6bn.  So the industry paid more in tax in one year than the $10bn Brown suspects will leave the country in dividends each year.

What Brown imagines is that all that money going to foreigners could be diverted into a Norwegian-style sovereign wealth fund.  It's not clear what he thinks will happen to the jobs and export income once foreign investment has been withdrawn because it no longer earns any profits, but Brown imagines that Australia could then be like Norway.  However, unlike the Norwegian government, the Australian government does not hold large ownership stakes in the minerals industry.  So the establishment of a minerals sovereign fund would not mean the diversion of existing government revenue into a fund but rather higher levels of taxation, discouraging work, saving and investment.  After all, why do these things if the government is just going to tax away your money?

Economic illiterates believe that with some tweaking the world can be made a better place.  In Brown's case the existence of a carbon tax and the demise of the coal industry would make the world a much better place.  Yet he has given little thought to how that world would be powered.  It's all very well talking about ''renewables'', but which renewables and how much would they cost?

As the Productivity Commission recently flagged, renewables are expensive;  wind power costs $150-$214 a megawatt hour, solar costs $400-$473 a megawatt hour.  By contrast, coal-fired electricity costs less than $100 a megawatt hour.

A coal-free Australia would be a lot more expensive, with lower standards of living.

Brown quoted the UN statistic that for every year of delay on climate change $1 trillion of costs will be incurred.  What he hasn't explained is how undermining the Australian economy would reduce that cost and why Australians should bear that cost when the UN hasn't managed to convince its members to act in concert on climate change.

The biggest problem Brown faces is that you can't intervene in the economy on the scale he desires without a massive reduction in our economic wellbeing.  The problem Australia faces is that Brown doesn't understand that point.

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