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Australian Financial Review : October 17th 2006
FBA 063 The Australian Financial Review www.afr.com Tuesday 17 October 2006 63 OPINION Imputation delivers a fair share Joel Fitzgibbon When Paul Keating introduced dividend imputation he described it as a ''Rolls- Royce reform''. Imputation has been a powerful and reliable vehicle of growth in the Australian capital market and economy. Nick Gruen's proposal (AFR, October 12) to scrap it in favour of a cut in the corporate tax rate should be rejected by policymakers. Since imputation was introduced in 1987, the sharemarket capitalisation has grown from $140 billion to $1.2 trillion. Sharemarket participation has grown from less than 20 per cent to more than 50 per cent. The turbocharger in the capital engine has been superannuation funds. The tax incentive created by the introduction of imputation and the fund earnings tax created an incentive for super funds to invest in the sharemarket. The enormous growth in super fund assets ($60 billion to $720 billion) has fuelled the growth in equity markets and freed up capital for investment in productive capacity. Since the extension of the imputation system to superannuation in 1988, super funds' domestic equity assets as a proportion of the market have risen from miniscule levels to a fifth of all the market. This surge in productive investment has been a factor in driving capital intensity, an essential element of total factor productivity. So the economic gains the nation now enjoys have in part resulted from the imputation system Gruen wants us to scrap. His plan would have some dramatic adverse consequences. He suggests dividend imputation be abolished to fund a cut in the company tax rate from 30 per cent to as low as 19 per cent. But super funds only pay tax at a rate of 15 per cent before imputation credits, and about 9 per cent after. The funds would not benefit from the corporate rate reduction but would effectively have their tax rate increased by two-thirds. Further, the reason the challenge of ageing is much less threatening in Australia than in many other Organisation for Economic Co- operation and Development countries is because of the strength of our superannuation system. Gruen's tax rise on super funds would threaten this more favourable outlook. And his plan involves a return to double taxation: investments in the sharemarket from after-tax earnings are then taxed again in the hands of the shareholders. This double taxation disadvantages equities relative to other investments. It would result in a tax induced distortion of capital away from equity and into housing and speculative investments that fail to fuel productivity growth. After all, the government has now halved the capital gains tax. Many self-funded retirees depend on imputation credits. They would be hit hard by the abolition of that system. The cut in company tax might create higher after-tax income for companies but there is no guarantee they would distribute it. The pressure for distributions, which imputation creates, would go. The plan amounts to shifting the tax burden from the big end of town to superannuants, and others who rely on imputation. Rather than getting rid of imputation, Labor is seeking to deepen and extend it and will be examining options to ensure that imputation credits are more widely available to resident shareholders. Joel Fitzgibbon is shadow assistant treasurer. Loggers fear forests backflip The Victorian government has the right forestry policies, but the industry needs to be assured they will be honoured, writes Tricia Caswell. It is vital to maintain the right balance between a profitable regional industry and the environment. Photo: ERIN JONASSON '' Sustainable management of native forests is imperative in ensuring the viability of regional communities.'' T he Victorian forestry industry is on the cusp of an investment boom. The state government's decision to establish an auction system for native timber will allow efficient companies to operate on an environmentally and economically sustainable basis. Already about six companies in East Gippsland have earmarked about $30 million to expand their operations. It is an exciting time. The industry is also encouraged by the Victorian government's commitments to allow logging in the state's native forests. Building on the regional forest agreement process in the 1990s and its seminal Our Forests, Our Future policy initiative in 2002, the government has established a policy framework that promotes the right balance between a vital and profitable regional industry and the environment. This approach has been reconfirmed with the recent release of the report titled the Sustainability Charter for Victoria's State Forests , which argues that the sustainable management of native forests is imperative in ensuring the economic viability of regional communities. All this body of evidence emanating from government studies strongly suggests there is a realisation in Spring Street that it is not a question of either/or when it comes to this industry. The environment and native forest harvesting are not mutually exclusive, especially when it is considered that this industry is ''greenhouse positive'' and that many countries have disastrous logging practices. (It is estimated Australia imports about $450 million worth of illegally logged timber a year.) This government has been acutely aware of the need to protect the environment. Of the state's 7.9 million hectares of native forest, less than 10 per cent ± about 651,300 hectares ± can be harvested. More than two- thirds of the 841,000 hectares of old- growth forest is in reserves or unavailable for harvesting. And harvesting only affects about 0.1 per cent of the total forest area in any one year ± about 9000 hectares of the 7.9 million hectares. At the same time the government is acknowledging the importance of forestry to Victoria. It contributes about $2 billion to the state's economy and employs nearly 20,000 workers directly and indirectly. But it is the industry's importance to regional economies that can't be overstated. In Gippsland, studies show that log production of 3 million cubic metres is worth $600 million to that economy; in terms of jobs, 3100 are directly employed and double that number indirectly employed. Breaking those figures down further, native hardwood generates about 50 per cent of this economic activity and employment. Compared with agriculture, native hardwood generates nearly as many jobs statewide and has a higher economic output on a per hectare basis. So important is the industry to Gippsland that government studies show six towns ± Orbost, Cann River, Bendoc, Nowa Nowa, Buchan and Newmerella ± face ''extinction'' if companies are denied access to native forests. Arguments that softwood plantations and tourism can fill the economic gap are simply not credible. Significantly, regional Victoria experienced a 10 per cent fall in domestic overnight visitors in 2005, a pertinent reminder that tourism is a cyclical industry. That regional Victoria needs a viable timber industry with access to native forests is undeniable; myriad state government reports highlight this. But the industry is still uncertain that the government will remain committed to honouring its own policies when it comes to guaranteeing resource security. The decision on the cusp of the 2002 election when the government decided to end logging in the Otways is still fresh in the industry's mind. The arguments advanced at that time lacked credibility on any environmental, scientific and economic grounds; it was pure politics. Hopefully, there will be no repeat performance by the government in the run-up to the state election next month. It has worked hard on the policy front to create the economic and environmental structures for the industry. In return, industry has responded and it would be a tragedy if this was derailed for perceived short-term political gain. Tricia Caswell is chief executive of the Victorian Association of Forest Industries. Canberra's costly global warming inertia The Howard government is looking increasingly flat- footed on climate change, writes Jon Stanford. F or a government skilled at second-guessing the ''average Australian'', the recent poll by the Lowy Institute must have come as a shock. It showed that 87 per cent of respondents believe that conserving the global environment is more important than the war on terrorism, while more than two- thirds would support significant action to address global warming now, even if it involved major costs. Far from being the exclusive concern of latte-sipping elites, therefore, climate change is becoming a barbecue stopper. Yet the response of ministers to Al Gore's recent Australian presentation of his An Inconvenient Truth suggests they remain sceptical of the need to take serious action to address global warming. Inaction in Canberra is in stark contrast to what is happening overseas. Recent projections suggesting that global warming is accelerating are animating many governments around the world. But Australia was a notable absentee from a climate summit held in Mexico earlier this month involving the G8 and other major emitters. The Australian government has taken some useful initiatives. These include engaging China and India with the US in the Asia-Pacific Partnership on Clean Development and Climate (AP6), promoting research and development in clean coal and establishing the inquiry into nuclear power. Beyond this, most economists would also agree with Prime Minister John Howard that significant unilateral action to reduce emissions will generally be welfare negative. It would impose economic costs on the Australian community while producing negligible benefits in terms of arresting climate change. But acceptance of this proposition in no way provides a basis for inaction. There is much more that could be done. First, because climate change is clearly a global problem, we need to participate in international action to address it by means of substantial reductions in emissions ± possibly by 60 per cent by 2050. Unfortunately, the federal government is nowhere to be seen when it comes to promoting global action to reduce emissions. Its failure to ratify the Kyoto Protocol, which would have cost Australia nothing, is puzzling. The suspicion remains that the decision, which has reduced business opportunities and is not in Australia's best interests, was made because of pressure from the US President. Yet the strength of the alliance provides a major opportunity, for example, to join forces with British Prime Minister Tony Blair and attempt to influence American policy in favour of significant global action. This possible approach is one that the government continues to ignore. Second, the adoption of ''no regrets'' policies to reduce emissions offers a welfare positive approach in that these measures also provide other benefits to the community. Increasing energy efficiency and introducing congestion charges in the larger cities are examples of such an approach. Again, governments have shown a distinct lack of enthusiasm for pursuing some of the more challenging no-regrets opportunities. The government is probably most exposed with regard to the third area of necessary policy intervention ± the provision of signals to investors. After years of surplus capacity, Australia will soon require significant investment in base load electricity generation. The risk of investing in a greenhouse-unfriendly coal plant is substantial, yet other technologies would be uncompetitive in the market in the absence of a carbon price. As the electricity industry itself has suggested, unless some policy signals are forthcoming, private investors are likely to sit on their hands. Australians are seeking government leadership on climate change. Much of the business community would welcome initiatives that offer greater policy certainty. State governments have devoted substantial resources to developing a proposal for emissions trading and, driven more by genuine concern than a desire to play politics, are openly seeking a lead from the commonwealth. In Canberra, officials are generally in favour of a much more vigorous greenhouse policy agenda, but there is a disturbing gap between their views and those of their political masters. An inconvenient truth for the government is that it is in danger of dropping the ball on climate change. Jon Stanford is co-chairman of Insight Economics.