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Treasury does some digging to offer a mine of useful myth-busting

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Economics Writer for The Sydney Morning Herald.
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Fair share ... "The mining tax will add about $3billion a year to the budget bottom line. This helps, but miners will still be paying slightly less than their share."

Fair share ... "The mining tax will add about $3billion a year to the budget bottom line. This helps, but miners will still be paying slightly less than their share." Photo: Phil Hearne

This week's budget contains some important myth-busting about Australia's mining boom, the biggest since the gold rush days. It contains some extraordinary numbers.

Did you know, for example, that the resource sector has an investment pipeline of $450 billion in the coming years? That's about a third of the total value of Australia's entire annual economic output.

And while mining accounts for just 9 per cent of economic output, Treasury puts the combined output of mining and mining-related sectors at between 15 and 20 per cent. And get this: this resource and resource-related part of the economy is forecast to grow an average of nearly 9 per cent a year over the next two years. To put that in context, that is faster than Treasury's growth forecast for the booming Chinese economy, which is 8 per cent.

By contrast, the rest of the economy is expected to grow at a below-trend rate of just 2 per cent. Not a recession, mind you, but on par with growth forecasts for the US economy. One foot in the furnace and one foot in an ice-bucket, as economists have observed.

The Gillard government has sold this budget as ''spreading the benefits of the boom'', but it's fair to say most Australians' understanding of the boom is pretty shaky.

For starters, most of us, about 85 per cent of the population, live in coastal cities far away from mining pits. The mining boom, to us, is largely invisible.

Meanwhile, the public slanging match between miners and the government has led to a proliferation of misunderstanding about the contribution of mining to the economy.

On the one hand, miners complain they already pay a disproportionate amount of tax. On the other, critics worry that the benefits of the boom are not enough to outweigh the negative impact of the higher Australian dollar on other sectors of the economy, like manufacturing and tourism.

Whom to believe? Neither, according to Treasury. Let's start with the miners first.

Myth No. 1: Mining companies pay too much tax.

Last month, the mining industry printed ads complaining it pays 500 per cent more taxes and royalties than 10 years ago. But Treasury counters by noting that over the past decade, the mining sector still paid less company tax, as a proportion of its profits, than other sectors of the economy.

While miners paid about 16 per cent of their profits (''gross operating surplus'' in economist lingo) in company tax, the finance sector stumped up tax of about 40 per cent of profits. The average of all sectors was close to 20 per cent.

Over the past decade, the mining sector has come to generate a higher proportion of total profits.

The mining sector's share of profits has risen from 16 per cent in 2002-03 to 29 per cent in 2011-12.

This has been accompanied by a massive investment boom in machines, equipment and buildings. This has meant that mining companies have been able to reduce their taxable income by claiming tax deductions for the depreciating value of that equipment. This has reduced the amount of tax they pay.

Budget papers show that while miners now generate about 30 per cent of company profits, they contribute only 15 per cent of the company tax take. The mining tax will add about $3 billion a year to the budget bottom line. This helps, but miners will still be paying slightly less than their share.

Australians are, however, benefiting in other ways from the boom, which brings us to …

Myth No. 2: The benefits of the boom are confined to the mining sector, while the rest of the economy is harmed by a higher dollar.

First, it is true that the mining sector directly employs only 2 per cent of the workforce. But a range of other industries also benefit.

For instance, mining activity leads to jobs in the construction of mines, plants, roads and rail infrastructure. The mining industry accounted for 60 per cent of investment in new buildings and other structures over the past year, up from 29 per cent at the start of the mining boom in about 2003.

Parts of manufacturing benefit too - particularly the manufacture of mining machinery and equipment. Jobs in research and development and exploration have also been created, as have jobs in transport, the finance and insurance services sectors, and the professional, scientific and technical sector.

Indirectly, the mining boom has helped to support retail jobs in some parts of the economy. Retail sales in Western Australia have grown 6.4 per cent a year since the start of the boom, compared with 4 per cent in Australia.

The rise of ''fly-in, fly-out'' work, which now accounts for half of WA's mineral and energy sector workforce, has also helped to directly spread income from the boom to many other parts of the country.

Indirectly, the higher dollar has made imports cheaper for consumers. According to Treasury, the price of goods, including manufactured goods and food, have grown just 0.6 per cent a year since the start of the boom, while household incomes have, on average, grown by about 7.2 per cent a year. Much of this spare income has been spent on services, boosting service sector jobs.

As yesterday's jobs figures show, Australia's unemployment rate remains at near historic lows.

This boom is not all gloom. And miners can afford to share a little more of the sunshine.

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