Each year we hear a familiar story about the rivers of gold that flood in because of high commodity prices, lifting the budget bottom line. But as the Australia Institute has talked about many times previously, the mining industry pays little tax. So what gives?

The reason we hear so much about revenue from commodity prices is because the budget consistently gets its estimates wrong, and it always seems to underestimate them. When Treasury are trying to estimate how much revenue the budget will have in the coming years, they have to make lots of predictions about how the economy is going to perform in the future. A strong economy will produce more tax revenue than a weak economy.

One of the predictions they make is how much our commodities are going to sell for. The problem is that Treasury always seem to think that they will sell for far less than they do. When the commodity prices end up selling for more than they predicted, the government ends up with more revenue than they thought. This happens not because the mining industry is suddenly paying more tax but rather because their predictions were wrong.

They do this deliberately so that their estimates are conservative, and the budget always surprises with more revenue than expected. As the Figure below shows, the terms of trade which is a comparison of our export prices and our import prices. A higher terms of trade means higher export prices compared to import prices. Most of the movement in the terms of trade is movements in commodity prices. This makes it is a great proxy for movements in resource prices.

The thick black line shows what actually happened to the terms of trade. We can see it moves around a bit and has gone up since the lows of the pandemic. At the moment they are relatively high. The thin colourful lines are the last 6 budgets with each budget’s predictions about what was going to happen to the terms of trade. Over the whole six years the terms of trade jumped around a bit (as commodity prices tend to do), but each budget’s predictions have always been for a big fall.

When those predictions turn out to be wrong, the budget gets an upgrade of revenue and we get the headlines that resources have saved the budget again.

But if Treasury deliberately and consistently predicted any other tax was going to be lower than it actually was, then it would be that tax that consistently ‘saved’ the budget.

And a quick glance at the latest budget predictions shows that yet again resource prices are expected to fall dramatically. Wait for next year’s budget to see prices revised up and revenues suddenly increase.

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