On the Volatility of Resource Rent Tax Revenue
The Australian Government has indicated that it expects revenue from the new Minerals Resource Rent Tax (MRRT) to be volatile. The Petroleum Resource Rent Tax (PRRT) is similar to the MRRT in many important respects; in particular, both taxes are targeted at similar bases (i.e. economic rents). A natural starting point for predicting the likely characteristics of aggregate MRRT revenue is to therefore examine revenue from the PRRT.
This paper shows that the PRRT has been a highly volatile source of revenue. In principle, PRRT revenue volatility may not be a significant problem for budgetary policy and planning if the revenue is negatively correlated with other tax revenues, or if volatile movements can be accurately forecast and incorporated into other revenue and spending decisions.
Unfortunately, PRRT revenue possesses none of these characteristics. The paper examines the PRRT revenue forecasting record of Australian governments since 1997-98. The results show that forecasts of PRRT revenue have generally been very inaccurate, with forecast errors routinely exceeding 40 per cent of actual PRRT revenue, and sometimes exceeding 100 per cent of actual revenue.
Even if PRRT revenue is difficult to predict, this may not be a significant problem if the forecast errors are uncorrelated (or, even better, negatively correlated) with other revenue forecast errors, so that forecasting mistakes “cancel out” one another. The analysis in this paper shows, however, that this is unfortunately not the case: forecast errors for PRRT revenue are highly positively correlated with overall tax revenue forecasting errors. In other words, the PRRT does not provide much of a revenue forecasting “hedge”.