Morrison finds his productivity report is useful for Labor too


File 20171024 30605 xcc2x1.jpg?ixlib=rb 1.1
Treasurer Scott Morrison on Tuesday said reform was harder now than in the 1990s.
Lukas Coch/AAP

Michelle Grattan, University of Canberra

Just as the government hopes it is making progress on the energy conundrum, it finds itself struggling on another front of deep public disgruntlement – the NBN.

The rollout of what’s generally considered a second rate model is producing a high level of complaints. Monday’s ABC Four Corners program showed how customers in Australia are getting an inferior service compared with New Zealanders.

The government predictably is blaming Labor, though much of the trouble stems from scaling back to a cheaper version than the one it inherited. Malcolm Turnbull, who oversaw the NBN as communications minister, argues it’s obvious that as more houses are connected, the number of complaints rises. That logic only goes so far.

Faults with household and business internet services are sensitive consumer issues. The blame game only increases people’s irritation. It’s been the same for months with electricity, as the government lambasted Labor while trying to get together its own energy policy, which it released last week.

Essential polling released on Tuesday indicates that at this early stage people are not hostile to that policy, but many are confused.

More than a third (35%) approved the proposed National Energy Guarantee, with only 18% opposed. But the “don’t know” category is 47%.

People divided fairly evenly when asked whether they approve the government’s decision not to include a Clean Energy Target in the new plan – 35% approved, 32% disapproved, and 33% were “don’t knows”.

But many people retain their strong attachment to renewables. Asked whether they approved the government decision to phase out subsidies for these, 41% disapproved, 32% approved.

This result shows that in political terms, it could be sensible for Labor to accept the basic structure of the government’s scheme – and promise to improve on it. At Tuesday’s Coalition party room, Turnbull predicted Labor would propose a higher level of renewables within the Coalition’s policy framework.

If so, that would provide a measure of bipartisanship, which would at least encourage investment.

As the government and opposition argue over the claim the new policy could bring down prices by a small amount – a proposition to be tested by the modelling the government commissioned last week – the Essential polling showed the public are healthily sceptical. Only 16% think it will; 31% believe it will increase prices.

The grim reality faced by the government is that it is hard to get any messages through the high level of public distrust, and this is exacerbated when the messages chop and change.

It’s not just in the energy area where this has happened. Since the Coalition won office in 2013 it has had to alter course on many policies and much of its initial ambition.

The early attempts of the Abbott government at swingeing changes quickly collided with the realities of an angry public and a truculent Senate.

Releasing a report on Tuesday from the Productivity Commission (PC) on Australia’s productivity performance, Treasurer Scott Morrison said reform was harder now than in the 1990s, when there was “a lot of low hanging fruit” and “the burning platform” of recession “focused the debate and compelled greater bipartisanship”.

These days, he said “reform comes more stubbornly and incrementally”.

“We also need to understand that many Australians are now far more sceptical of change. Whenever governments mention the word ‘reform’ or ‘productivity’, they get nervous. They’ve seen this movie before.

“Unlike last time when economic reform was a mystery to most, this time around Australians are more alive to the costs of change as well as the benefits.

“Plus, the economic and political bandwidth available for change is narrower than it once was, made more difficult by the binary way change is viewed and exploited. Who are the winners and who are the losers? Where is the conflict?” Morrison said.

While his argument is right, other factors were also important to achieving reform in the 1980s and early 1990s under the Hawke-Keating government. Some of the change involved trade offs, under the accord with the trade union movement. And reform was better sold by the political leadership than today.

The PC report promotes a reform agenda focused on individuals, “involving the non-market economy (mainly education and healthcare), the innovation system, using data, creating well-functioning cities, and re-building confidence in institutions”.

The recommendations are a mixed bag of old and new, the sensible and – as happens with the PC – the near impossible, either politically or practically (such as automatic dispensing of medicines).

The report’s language is redolent of that used by Labor, notably when it says that “a key issue will be to ensure that future economic, social and environmental policies sustain inclusive growth — by no means guaranteed given current policy settings, and prospective technological and labour market pressures.

“Productivity growth provides a capacity for higher incomes and poverty alleviation — either directly through higher wages or indirectly by increasing the capacity for funding transfers to lower-income households.

“The motivation for limiting inequality extends beyond its intrinsic value to the desirability of avoiding too great a dispersion in incomes, given evidence that this can, in its own right, adversely affect productivity growth. Public support is also more likely for reforms that offer benefits to the bulk of people.”

Shadow treasurer Chris Bowen said: “The Productivity Commission has pointed out that investment in our human capital is the key to economic growth. Well we agree, we agree strongly.”

Morrison is alert to this possible political crossover.

“I haven’t got up here today to talk about a new inclusion agenda”, he told a CEDA function. “I’m talking about a productivity agenda”.

“From a Liberal-National perspective, we’re coming at this quite differently from our political opponents. This isn’t about social justice. This is about more and better paid jobs, because I think that’s the best justice for anyone. … This is about lifting living standards.

“I’m not trying to settle scores in health and education as some sort of social justice wars. I’m just trying to lift people’s wages.

“This is not the product of ideology, it’s the product of economics and the economics say pretty clearly that people [who] are healthier and better equipped through the education system are going to do better.”

The ConversationSharing ground with Labor can be uncomfortable.

https://www.podbean.com/media/player/k27zv-7889f2?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Advertisements

Five ways to kickstart the economy — without cutting company taxes



File 20171024 30613 1wwxq9b.jpg?ixlib=rb 1.1
The Productivity Commission has recommended sweeping changes to how infrastructure is governed.
Shutterstock

Jim Minifie, Grattan Institute

The Productivity Commission has released the first in a planned series of five-yearly updates on productivity in Australia. The report shows that there is much the Australian government can do to boost productivity and living standards.

These include changing how government delivers or controls education and health, and how it manages infrastructure. Interestingly, for the Commission, policy to improve productivity in the private sector (primarily tax and regulation), while still important, plays second fiddle.

The Commission backs up its recommendations in these huge domains by a compendium of analyses spread over hundreds of pages in 16 supporting papers.


Read more: Why reforming health care is integral for our economy


The Productivity Commission’s review comes amid a period of slow productivity growth in Australia and around the developed world. Fifteen years ago, most economists expected that the internet revolution and the rapid shift of manufacturing to China would, for all the disruption they entailed, sustain strong growth in the rich world. But those hopes were dashed.

A wide range of research has identified many possible culprits for the productivity slowdown. These include mismeasurement, that “easy wins” such as universal education have already been used up, ageing, risk aversion, and a hit to investment and innovation from the global financial crisis.

One of the Commission’s background papers covers many of these contributors to slow growth.

Australian productivity has grown faster than in many other high-income economies since the financial crisis, largely thanks to the mining boom and to our having avoided a deep recession.

But productivity growth has not been strong enough to keep wage growth strong in the face of declining export prices and some broader weakness as the mining investment boom comes off. Getting policy settings right is urgent to reduce the risk that Australia slides into the stagnation that other high-income economies have experienced.

The recommendations

The new report identifies five priorities to revitalise productivity: health, education, cities, market competition, and more effective government.

The Commission’s estimates imply that its policies would eventually boost GDP by at least two per cent, with additional non-market benefits in longer lives and quality of life.

In health, the report recommends changing funding arrangements, cutting low-value treatments, putting the person at the centre of health care, shifting to automated pharmacy dispensing in many locations, and moving to tax alcohol content on all drinks. The Commission estimates that the value of these reforms is at least A$8.5 billion over 5 years.

In education, the report makes recommendations to build teacher skills, better measure student and worker proficiency, extend consumer law to cover universities, and improve lifetime learning, including better information about the performance of institutions. The Commission does not put a dollar value on these reforms.


Read more: Myth busting claims on the impact of the company tax cut


In cities and transport, the report recommends improved governance to stop poor projects being built, budget and planning practices to properly provide for growth and infrastructure, and policies to get more value out of existing and new assets (including road user charges, extending competition policy principles to cover land use regulation, and replacing stamp duties with land tax). The Commission estimates that these reforms would be worth at least A$29 billion per year in time.

To improve market competition, the report suggests a single effective price be placed on carbon, an end to ad-hoc interventions in the energy market, better consumer control of and access to data, and reforms to intellectual property to support innovation. The Commission estimates that these reforms would be worth at least A$3.4 billion per year.

Finally, to improve government, the report recommends that the states and the Commonwealth develop a new formal reform agenda that clarifies who has responsibility for what, tax changes, measures to improve fiscal discipline, and tougher accountability for implementation of agreed initiatives. The Commission does not put a dollar value on these reforms.

What’s missing?

The review’s omissions are informative, and some are glaring.

First, cutting company taxes is conspicuously absent from the proposals. It seems unlikely this omission is an oversight. It would seem, instead, that the Commission does not see a company tax cut as a priority for productivity growth, and is happy for government to make its own case for a tax cut.

Still, the report would have been stronger had it considered the tax mix more fully. There is credible case for a company tax cut, though it is not the only way to stimulate investment, it would take years to pay off, and it would hit the budget without increase in other taxes or spending cuts.

Second, the report gives short shrift to population growth. Governments are racing to keep pace with population growth in Melbourne and Sydney in particular, yet the report does not consider how population contributes to congestion, how it dilutes the value of natural resource rents, and how the challenges it creates for governments make it more difficult for them to deliver reforms that would boost productivity.


Read more: City planning suffers growth pains of Australia’s population boom


Third, the report does not give enough attention to reforms to improve market functioning. Many consumers in retail markets for services like energy and superannuation do not know how to identify good products, and so consumers often bear the costs of excess marketing or an excess of providers.

It seems likely that the Commission did not want to prejudge the subject of a current Commission inquiry on superannuation, but other markets have similar problems.

There are other gaps. The report does not give enough attention to macroeconomic stability, or even note the risks posed by the Australian house price boom. It does not mention the problematic National Broadband Network. It pays too little attention to the role of social safety nets in helping people manage risks and making the economy more flexible.

And finally, the report could have made stronger recommendations for better measurement. It is ironic that it finds the biggest opportunities in the health and education sectors, whose output is not measured with much accuracy.


Read more: Myth busting claims on the impact of the company tax cut


Overall, the report is something of a landmark, and the Treasurer deserves credit for commissioning it. It condenses much of the policy advice the Productivity Commission has made in recent years, and adds new insights (for example, on land use).

It provides credible, if incomplete recommendations for improving health and education, and cities and transport. It undersells the value of further reforms to private sector regulation and tax. But it underscores how much governments can do on the “home turf” of the things they control most directly.

The ConversationNow it is up to Commonwealth and state governments to absorb its insights, integrate them into their agendas, and put them into action.

Jim Minifie, Productivity Growth Program Director, Grattan Institute

This article was originally published on The Conversation. Read the original article.

Why reforming health care is integral for our economy



File 20171024 1722 1be3haa.jpg?ixlib=rb 1.1
Healthcare is becoming increasingly important in a services-led economy.
Shutterstock

Michael Woods, University of Technology Sydney

Australia’s productivity growth has been stagnant for over a decade and, according to a new report, our health policies and programs could be partly to blame. Released today, the Productivity Commission report also highlights how the health-care sector (among others) could play a starring role in improving productivity.

The commission has offered a short list of thematic directions for reform. In health these include eliminating low-value services that have uncertain clinical impacts, changing the way services are delivered to focus more on the patient, and moving away from a community pharmacy model to more automatic dispensing in a greater range of more convenient locations.

The underlying message is that productivity growth is essential if Australia is to expand its economy, generate opportunities for real income growth and raise community living standards.

But as a Productivity Commission discussion paper released last November noted, there is a justified global anxiety that growth in productivity — and in income and well-being, which are inextricably linked to it over the longer term — has slowed or stopped. Across the OECD, growth in GDP per hour worked was lower in the decade to 2016 than in any decade from 1950.

The commission notes that labour productivity has been rising, but that has more to do with greater capital investment than more efficient workforce practices.

The report also highlights a change in thought about productivity. The emphasis has shifted from the need to produce goods more cheaply to improving our human capital – the knowledge, skills and work practices of our community – and delivering more efficient and effective health, education and related services.

The change recognises that Australia is now predominantly a service economy, that health care is a significant economic service, and that the productivity of our workforce, including its health, needs to underpin our economic growth.

The health sector is big and still growing

The health sector is a big part of our economy and still growing as a proportion of our overall economy. By 2016, according to the OECD, it accounted for 9.6% of our total gross domestic product.

This is similar to that of New Zealand and the United Kingdom, less than Canada and far less than the United States – which is an international outlier at over 17% of its total domestic output. Add aged care and disability services, and the commission puts the figure at 13% of Australia’s GDP.

We continue to spend ever more on health, in real (inflation-adjusted) terms, both as taxpayers and as consumers. But are we getting good value for our money? An inefficient health system, wrongly priced services and poorly designed system incentives all drag on the cost of health care and on the productivity of a very large sector of the economy.

A decade ago, the health-care and social-assistance sector employed nearly 1.07 million people. This was a little less than retailing (1.21 million) and a little more than manufacturing (1.03 million). The health sector employed 10.3% of the Australian workforce.

Fast forward to 2017 and retail employment has stayed relatively stable at 1.26 million and manufacturing has declined to 0.9 million. In contrast, health care and social assistance has risen to 1.64 million – 13.3% of total employment.

Any opportunity to increase the efficiency of the health workforce will translate directly to greater labour productivity for the economy as a whole. And its effectiveness can be improved, in part by education and training, which improves the skills of our doctors, nurses, allied health workers and others to work collaboratively to deliver patient-centred care. This is the subject of an independent review for the COAG Health Council by this article’s author.

The actual productivity of the health workforce, unfortunately, is notoriously hard to measure. This is due in no small part to the lack of market forces and to wage costs that are often negotiated between unions and their employers – the governments.

The Productivity Commission’s forthcoming report on improving markets and competition in health and other human services will hopefully offer useful guidance on what reforms are needed in some of these sectors.

Workforce health is an important part of our human capital

A third role for a more efficient and effective health sector is to contribute to improving the health of the workforce overall. Education and health are recognised as the two most significant building blocks of human capital. Making the most of our human capital is a central message of the OECD’s research on productivity.

There is also ample evidence, including in the new Productivity Commission report, that poor health leads to poor labour market outcomes. A 2013 study into disadvantage in Australia concluded that people with long-term health conditions are likely to experience deep and persistent disadvantage, but, equally, disadvantage can lead to poor health.

Back to the future

The challenge remains to reform the health system, and its workforce in particular, so that practitioners, administrators and others have the skills, knowledge and professional attributes to meet the emerging health-care needs of our community.

As the Australian Institute of Health and Welfare points out in its latest review of Australia’s health, the community’s burden of disease is changing. There is now a greater need for longer-term integrated care to deliver services for those with chronic diseases, the elderly, those with dementia, disability and poor mental health, and to provide services to those in rural areas and remote communities.

The message in this latest report is welcome, but unfortunately it is not entirely new. A Productivity Commission report over a decade ago made the point that Australia’s growth potential will depend increasingly on making the best use of our human capital.

One of the aspirations at that time was for an agreed agenda of integrated health services reform within a national framework. It was seen as a way of adding much-needed impetus to overcoming long-standing structural problems that prevented the health-care system from performing to its potential.

The ConversationLittle progress has been made since then. Hence this report is important in reinforcing the message that the next big gains in productivity will need to come from reforming the delivery of health and education. Let’s hope the call for a shared agenda of reforms is taken up more actively than experience to date might suggest.

Michael Woods, Professor of Health Economics, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

Household savings figures in Turnbull’s energy policy look rubbery


Michelle Grattan, University of Canberra

The big questions about Malcolm Turnbull’s energy policy will be, for consumers, what it would mean for their bills and, for business, how confident it can be that the approach would hold if Bill Shorten were elected.

The government needs to convince people they’ll get some price relief, but even as Turnbull unveiled the policy the rubbery nature of the household savings became apparent.

Crucially, the policy aims to give investors the certainty they have demanded. But the risk is this could be undermined if Labor, which is well ahead in the polls, indicated an ALP government would go off in yet another direction.

And most immediately, there is also the issue of states’ attitudes, because their co-operation is needed for the policy’s implementation. Turnbull talked to premiers after the announcement, and the plan goes to the Council of Australian Governments (COAG) next month.

Turnbull describes the policy as “a game-changer” that would deliver “affordability, reliability and responsibility [on emissions reduction]”.

Unsurprisingly – given it would end the subsidy for renewables, rejecting Chief Scientist Alan Finkel’s recommendation for a clean energy target – the policy sailed through the Coalition partyroom with overwhelming support.

Finkel later chose to go along with it rather than be offended by the discarding of his proposal. The important thing, he said, was that “they’re effectively adopting an orderly transition” for the energy sector, which was what he had urged.

In the partyroom Tony Abbott was very much a minority voice when he criticised the plan; his desire for a discussion of the politics was effectively put down by a prime minister who had his predecessor’s measure on the day.

The policy – recommended by the Energy Security Board, which includes representatives of the bodies operating and regulating the national energy market – is based on a new “national energy guarantee”, with two components.

Energy retailers across the National Electricity Market, which covers the eastern states, would have to “deliver reliable and lower emissions generation each year”.

A “reliability guarantee” would be set to deliver the level of dispatchable energy – from coal, gas, pumped hydro, batteries – needed in each state. An “emissions guarantee” would also be set, to contribute to Australia’s Paris commitments.

According to the Energy Security Board’s analysis, “it is expected that following the guarantee could lead to a reduction in residential bills in the order of A$100-115 per annum over the 2020-2030 period”. The savings would phase up during the period.

When probed, that estimate came to look pretty rough and ready. More modelling has to be done. In Question Time, Turnbull could give no additional information about the numbers, saying he only had what was in the board’s letter to the government.

So people shouldn’t be hanging out for the financial relief this policy would bring. Although to be fair, Turnbull points to the fact it is part of a suite of measures the government is undertaking.

Business welcomed the policy, but made it clear it wanted more detail and – crucially – that it is looking for bipartisanship.

The Australian Chamber of Commerce and Industry said the policy’s detail “and its ability to win bipartisan and COAG support will be critical”. Andy Vesey, chief executive of AGL, tweeted that “with bipartisan support” the policy would provide investment certainty.

//platform.twitter.com/widgets.js

The Australian Industry Group said it was “a plausible new direction for energy policy” but “only bipartisanship on energy policy will create the conditions for long-term investment in energy generation and by big energy users”.

It’s not entirely clear whether the government would prefer a settlement or a stoush with the opposition on energy.

Turnbull told parliament it had arranged for the opposition to have a briefing from the Energy Security Board, and urged Labor to “get on board” with the policy.

But Labor homed in on his not giving a “guarantee” on price, as well as the smallness of the projected savings. Climate spokesman Mark Butler said it appeared it would be “just a 50 cent [a week] saving for households in three years’ time, perhaps rising to as much as $2.00 per week in a decade”.

But while the opposition has gone on the attack, it is also hedging its bets, playing for time.

“We’ve got to have … some meat on the bones,” Butler said. “Because all the prime minister really announced today was a bunch of bones.”

“We need detail to be able to sit down with stakeholders, with the energy industry, with big businesses that use lots of energy, with stakeholder groups that represent households, and obviously state and territory governments as well, and start to talk to them about the way forward in light of the announcement the government made today,” he said.

The initial reaction from state Labor is narky. Victorian Premier Daniel Andrews said it seemed Finkel had been replaced by “professor Tony Abbott as the chief scientist”, while South Australia’s Jay Weatherill claimed Turnbull “has now delivered a coal energy target.”

These are early days in this argument. Federal Labor will have to decide how big an issue it wants to make energy and climate at the election. Apart from talking to stakeholders and waiting for more detail, it wants to see whether the plan flies at COAG.

If it does, the federal opposition could say that rather than tear up the scheme in government, it would tweak it and build on it. That way, Labor would avoid criticism it was undermining investment confidence.

The ConversationBut if there is an impasse with the states and the plan is poorly received by the public, the “climate wars” could become hotter.

https://www.podbean.com/media/player/sk78v-786f19?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Federal government unveils ‘National Energy Guarantee’ – experts react


Alan Pears, RMIT University; Anna Skarbek, Monash University, and Dylan McConnell, University of Melbourne

The federal government has announced a new energy policy, after deciding against adopting the Clean Energy Target recommended by chief scientist Alan Finkel.

The new plan, called the National Energy Guarantee, will require electricity retailers to make a certain amount of “dispatchable” power available at all times, and also to reduce the electricity sector’s greenhouse emissions by 26% relative to 2005 levels by 2030.

The government says it will save the average household up to A$115 a year after 2020, while also ensuring reliability. Below, our experts react to the new policy.


Read more: Infographic: the National Energy Guarantee at a glance


“The federal government will be even less important in energy policy”

Alan Pears, Senior Industry Fellow, RMIT University

Business, state governments and the energy industry have been clamouring for more certainty from the federal government. Now they have it: the federal government will be even less important in shaping energy and climate policy than in the past, leaving states and territories, local government, business and households to focus on driving the energy revolution and cutting emissions.

The new policy will impose a reliability obligation on energy retailers, who will presumably have to select an appropriate mix of energy suppliers to meet it, and the devil will be in the detail. If the required proportion of dispatchable electricity is reasonable, and if retailers and new renewable energy generators are free to decide how to deliver it, then the cost and difficulty of compliance may be modest.

For example, retailers and generators could piggyback on the demand response capacity volunteered for the ARENA Demand Response project. This could help accelerate the rollout of a variety of energy storage solutions, in turn reducing the market power of the big generators and driving down energy prices.

On the other hand, if the options are limited, the obligation could increase the market power of the gas industry, meaning no relief from high wholesale prices.

It will also be interesting to see if the obligation is applied across all new generation. If so, it could significantly increase the cost of new coal generation, as retailers would have to cover the risk of failure of a large generation unit, as well as managing its slow response to changing demand.


“Australia’s electricity sector can cut emissions more”

Anna Skarbek, Chief Executive, ClimateWorks Australia, Monash University

The key question is whether the emissions guarantee will be strong enough for Australia to meet its current and future climate obligations under the Paris Agreement.

Electricity creates more than one-third of Australia’s total emissions. If we don’t reduce the emissions in our electricity, then we don’t unlock other emissions reduction opportunities such as electric vehicles.

If the National Energy Guarantee aims at cutting emissions by only 26% by 2030 then other sectors across the economy would have to make greater emissions
reductions sooner.

But our research shows that Australia’s electricity sector can cut emissions by 60% below 2005 levels by 2030. Harnessing this potential will help us to reach future targets that progressively increase under the Paris Agreement.

If you don’t achieve deep emissions reductions in the electricity sector, a major strengthening of policy will be needed for the other sectors where there is less momentum currently. For example, stronger action would be needed in transport, buildings, industry and land.

Australia’s climate policy, which is being reviewed before the end of the year, will need to cover more than just the electricity sector. Other measures should include the introduction of vehicle emissions standards, a more stringent
national building code, a dramatic improvement in the uptake of energy efficiency measures across industry and stronger incentives for reforestation.


How the reliability guarantee will work

Dylan McConnell, Researcher at the Australian German Climate and Energy College, University of Melbourne

Under the NEG retailers are responsible for ensuring continuous supply of energy. But retailers don’t always generate the energy they sell. In order to meet the NEG’s reliability obligation retailers will most likely enter into cap contracts with generators.

Unlike other kinds of contracts, which impose a fixed price, cap contracts only come into play when high demand pushes energy prices over a certain pre-agreed level. At that point, generators with flexible dispatchable power guarantee that they will provide extra energy.

The extreme peaks, where the price heads to A$14,000 per megawatt hour – only come a couple of times a year, if at all. To compensate generators for building all that extra capacity, retailers pay a daily premium. Cap contracts essentially act as insurance: they protect retailers from extremely high prices during intense demand, and they offer generators the chance of steep profits.

Cap contracts are a standard part of the market, and retailers already used them to manage their risk exposure. The Energy Security Board has said:

This reliability guarantee would require retailers to hold forward contracts with dispatchable resources that cover a predetermined percentage of their forecast peak load.

If the new reliability standards are in line with retailers own internal guidelines, the impact on the market should be minimal. But if the government imposes higher standards, retailers will have to purchase more cap contracts (or build their own dispatchable power plants).

If demand for cap contracts increase, it would most likely encourage investment in gas and hydro power plants.


The ConversationThis article was updated on October 18.

Alan Pears, Senior Industry Fellow, RMIT University; Anna Skarbek, CEO at ClimateWorks Australia, Monash University, and Dylan McConnell, Researcher at the Australian German Climate and Energy College, University of Melbourne

This article was originally published on The Conversation. Read the original article.

The government’s energy policy hinges on some tricky wordplay about coal’s role


John Quiggin, The University of Queensland

The most important thing to understand about the federal government’s new National Energy Guarantee is that it is designed not to produce a sustainable and reliable electricity supply system for the future, but to meet purely political objectives for the current term of parliament.

Those political objectives are: to provide a point of policy difference with the Labor Party; to meet the demands of the government’s backbench to provide support for coal-fired electricity; and to be seen to be acting to hold power prices down.

Meeting these objectives solves Prime Minister Malcolm Turnbull’s immediate political problems. But it comes at the cost of producing a policy that can only produce further confusion and delay.


Read more: Federal government unveils ‘National Energy Guarantee’ – experts react


The government’s central problem is that, as well as being polluting, coal-fired power is not well suited to the problem of increasingly high peaks in power demand, combined with slow growth in total demand.

Coal-fired power plants are expensive to start up and shut down, and are therefore best suited to meeting “baseload demand” – that is, the base level of electricity demand that never goes away. Until recently, this characteristic of coal was pushed by the government as the main reason we needed to maintain coal-fired power.

The opposite of baseload power is “dispatchable” power, which can be turned on and off as needed.

Classic sources of dispatchable power include hydroelectricity and gas, while recent technological advances mean that large-scale battery storage is now also a feasible option.

Coal-fired plants can be adapted to be “load-following” which gives them some flexibility in their output. But this requires expensive investment and reduces the plants’ operating life. The process is particularly ill-suited to the so-called High Efficiency, Low Emissions (HELE) plants being pushed as a solution to the other half of the policy problem, reducing carbon dioxide emissions.

Given that there is only limited capacity to expand hydro (Turnbull’s Snowy 2.0 is years away, if it ever happens) and that successive governments have made a mess of gas policy, any serious expansion of dispatchable power would realistically need to focus on batteries. The South Australian government reached this conclusion some time ago, making a decision to invest in its own battery storage. That move was roundly condemned by the federal government, which at the time was still focused on baseload.

The government’s emphasis on baseload was always mistaken, but the confusion and noise surrounding energy policy meant that few people understood this. That changed in September when the Australian Energy Market Operator (AEMO) reported that Australia’s National Electricity Market faced a capacity shortfall of up to 1,000 megawatts for the coming summer, and that older baseload power stations will struggle to cope.

Clearly this situation called for more flexibility in dispatchable sources in the short term, and widespread investment in dispatchables for the long term.

A question of definition

Obviously, this presented Turnbull with a dilemma. The policy advice clearly favoured dispatchables, but vocal members of his backbench wanted a policy to subsidise coal.

The answer was breathtakingly simple. The new policy redefines coal as dispatchable, despite it having the opposite technological characteristics.

This is not an entirely new approach. Before the government decided to abandon the proposed Clean Energy Target it put a lot of effort into redefining coal as “clean”. The approach here involved creating confusion between carbon capture and storage (CCS) and HELE power stations. CCS involves capturing carbon dioxide from power station smokestacks and pumping it underground, thereby avoiding emissions. This would be a great solution to the problems of carbon pollution if it worked, but unfortunately it’s hopelessly uneconomic

By contrast, HELE is just a fancy name for the marginal improvements made to coal-fired technology over the 30-50 years since most of our existing coal-fired plants were designed and built. The “low” emissions are far higher than those for gas-fired power, let alone renewables or, for that matter, nuclear energy (another uneconomic option).

The core of the government’s plan is a requirement that all electricity retailers should provide a certain proportion of dispatchable electricity – a term that has now been arbitrarily defined to include coal. By creating a demand for this supposedly dispatchable power, the policy discourages the retirement of the very coal units that AEMO has identified as ill-suited to our needs.

Elusive certainty?

Given that the policy is unlikely to survive beyond the next election, it’s unlikely that it will prompt anyone to build a new gas-fired power station, let alone a coal-fired plant. So the only real effect will be to discourage investment in renewables and create yet further policy uncertainty.

This undermines the basis for the (unreleased) modelling supposedly showing that household electricity costs will fall. These savings are supposed to arise from the investment certainty resulting from bipartisan agreement. But the political imperative for the government is to put forward a policy Labor can’t support, to provide leverage in an election campaign. If the government had wanted policy certainty it could have accepted Labor’s offer to support the Clean Energy Target.

The ConversationIt remains to be seen whether this scheme will achieve the government’s political objectives. It is already evident, however, that it does not represent a long-term solution to our problems in energy and climate policy.

John Quiggin, Professor, School of Economics, The University of Queensland

This article was originally published on The Conversation. Read the original article.

Subsidies for renewables will go under Malcolm Turnbull’s power plan


Michelle Grattan, University of Canberra

The government is set to unveil its long-awaited energy plan that would scrap subsidies for renewables and impose obligations on power companies to source a certain proportion of “reliable” supply.

While the plan emphasises reliability and reducing power prices, the government is also confident it would allow Australia to meet its commitments under the Paris climate change agreement.

Cabinet considered the scheme on Monday night. It goes to the Coalition partyroom on Tuesday morning, before being announced later in the day.

It follows months of uncertainty and internal pressures within the Coalition over the future of energy policy, as the government battles to head off the risk of blackouts as well as to quell mounting voter anger at soaring bills.

In a report released on Monday the Australian Competition and Consumer Commission said residential electricity prices have increased by 63% on top of inflation in the last decade, with network costs being the major contributor.

As the government has flagged for a week, its plan rejects the clean energy target recommended in June by Chief Scientist Alan Finkel, to which Malcolm Turnbull initially appeared favourably disposed.

Ironically, the alternative scheme has been worked up by the Energy Security Board, a new body that was established on a recommendation from the Finkel inquiry.

Under the scheme, power companies would have twin obligations imposed on them by the government.

  • They would be required to get a certain amount of power from “reliable” sources – whether coal, gas, hydro, or batteries.

  • They would also have to source another amount that was consistent with lowering emissions in line with Australia’s international commitments. Australia has signed up to reducing greenhouse gas emissions to 26–28% below 2005 levels by 2030.

It would be up to the companies as to how they met the obligations put on them.

The plan assumes that prices would be driven down because the scheme would give the certainty that investors have been looking for, so supply would increase.

The Coalition party meeting will be given an estimate of the expected savings on power bills, which would be more than the A$90 annual household saving estimated under the Finkel target.

The scheme is expected to appeal to the right in the Coalition because there are no subsidies for renewables, making for a level playing field – coal is treated the same as wind and solar.

The present renewable energy target would continue until its expiry in 2020, after which there would be no new certificates issued under it.

The Energy Security Board has on it an independent chair, Kerry Schott, and deputy chair, Clare Savage, as well as the heads of the Australian Energy Market Operator (AEMO), the Australian Energy Regulator, and the Australian Energy Market Commission.

The ABC reported that Drew Clarke, a former chief-of-staff to Turnbull and former head of the communications department, will become AEMO’s chair. This would be an appointment by the Council of Australian Governments.

In Question Time, Opposition Leader Bill Shorten accused Turnbull of “caving in” to Tony Abbott by rejecting a clean energy target.

Turnbull said the government “will deliver a careful energy plan based on engineering and economics, designed to deliver the triple bottom line of affordability, reliability and meeting our international commitments. And that is in stark contrast to the ideology and the idiocy that have been inflicted on us for years by the Australian Labor Party.”

Abbott, speaking on 2GB, said that “we’ve got a big policy problem” that needed to be addressed. This included “continued heavy subsidies for unreliable power”, lack of new coal-fired baseload power, bans on gas and a lack of incentives for farmers to go along with gas development, and bans on nuclear power.

Abbott said the problem over the last few years was that “we haven’t been running a system for affordability and reliability, we’ve been running a system to reduce emissions. It’s given us some of the most expensive power in the world and this is literally insane, given that we are the country with the largest readily available reserves of coal, gas and uranium.”

The ConversationMonday’s Newspoll found that 63% thought taxpayer-funded subsidies for investment in renewables should be continued; only 23% thought they should be removed. But 58% said they would not be prepared to pay any more for electricity in order to implement a clean energy target to foster more renewable energy sources.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Power bills can fall – but the main attention must be on affordability: ACCC


Michelle Grattan, University of Canberra

The chairman of the Australian Competition and Consumer Commission (ACCC), Rod Sims, holds out the prospect of an absolute fall in electricity bills over coming years – but says this will require focusing centrally on affordability, not just reliability and sustainability.

In its Retail Electricity Pricing Inquiry preliminary report into the electricity market, released on Monday, the ACCC says residential electricity prices have increased by 63% on top of inflation in the last decade, with network costs being the major contributor.

Household bills rose by nearly 44%, from an average of A$,1177 in 2007-08 to $1,691 in 2016-17.

Household bills have risen less than electricity prices because usage has fallen, mainly due to self-supply by solar panels.

The report comes as cabinet is set to consider on Monday the government’s energy policy, which it hopes to take to the Coalition partyroom on Tuesday. Energy Minister Josh Frydenberg last week signalled the government had moved away from the Finkel inquiry’s recommendation for a clean energy target.

Facing the prospect of a shortage of power in the period ahead, the government is particularly focused on the need to increase dispatchable power.

The clean energy target, even in modified form, is also unpopular in Coalition ranks.

The ACCC report indicates that supporting renewable energy has been a relatively minor driver of the spiking of prices.

Sims – who flagged the ACCC findings when he addressed the National Press Club recently – says affordability should be the “dominant” objective in policy but in recent years it has come after several other objectives – including reliability, dividends and sustainability.

He said different approaches were needed to pursue each of the objectives of affordability, reliability and sustainability. As reliability and sustainability were pursued, it was important to do it in “the least-cost way and to let people know the costs”.

“What’s clear from our report is that price increases over the past ten years are putting Australian businesses and consumers under unacceptable pressure,” he said.

The ACCC found that on average across the national electricity market (which does not include Western Australia or the Northern Territory), a 2015-16 residential bill was $1,524, excluding GST. This was made up of network costs (48%), wholesale costs (22%), environmental costs (7%), retail and other costs (16%) and retail margins (8%).

Sims said the primacy of network costs in rising bills was not widely recognised.

Since July 2016, retail price rises were likely to be driven by higher wholesale prices.

“We estimate that higher wholesale costs during 2016-17 contributed to a $167 increase in bills. The wholesale (generation) market is highly concentrated and this is likely to be contributing to higher wholesale electricity prices.”

The ACCC estimates that in 2016-17 South Australia had the highest residential electricity prices, followed by Queensland, then Victoria and New South Wales. SA prices were roughly double those in Europe.

Sims said measures the government had already taken – notably telling companies to make customers aware of better deals, and its plan to scrap the process allowing companies to appeal against decisions of the Australian Energy Regulator – would help lower prices.

The ACCC is now looking in detail at further measures, ahead of making a final report. In the meantime, its preliminary report puts forward some suggestions. These include the states reviewing concessions policy to ensure consumers know their entitlements and concessions are well targeted to the needy, and a tougher stand against market breaches.

It says increased generation capacity (particularly from non-vertically integrated generators), preventing further consolidation of existing generation assets, and lowering gas prices could help reduce the pressure on bills.

The ACCC will also look at how to mitigate the effect of past investment decisions – but it notes that many are “locked in” and will continue to burden users for many years.

It will as well consider what more can be done to make it easier for consumers to switch suppliers.

The report says that “an increasing number of consumers are reporting difficulties meeting their electricity costs, and some consumers have been forced to minimise their spending on other essential services, including food and health services, to afford electricity bills.

“Businesses across all sectors have faced even higher increases over the past 12 months, following renegotiation of long term contracts. Many of these businesses cannot pass the increased costs on and are considering reducing staff or relocating overseas. Some businesses have even been forced to close.”

The ConversationThe ACCC’s final report will be released in June next year.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Middle income earners probably won’t be paying as much tax as the government expects



File 20171016 21951 yfukwd.jpg?ixlib=rb 1.1
The PBO has likely overestimated future personal income tax revenue.
Shutterstock

Phil Lewis, University of Canberra

The federal government’s return to a budgetary surplus by 2020/21 will mainly be due to a projected increase in personal income tax revenue, according to a report from the Parliamentary Budget Office (PBO).

The PBO modelling shows that people in the middle of the income spectrum will bear the brunt of this, due to bracket creep. This occurs when tax thresholds (including the tax free threshold) stay constant while income grows due to inflation.

But the PBO modelling includes assumptions about inflation and wages growth that do not bear a resemblance to what is happening in the economy. Both inflation and wages growth have been depressed for some time, and there’s little reason to believe there will be a sudden increase.


Read more: How market forces and weakened institutions are keeping our wages low


The fundamental assumption driving the PBO projections is nominal (not adjusted for inflation) income growth of between 4% and 5%. This consistutes 2% to 2.5% annual inflation and 2.5% to 3% percent annual increase in real income.

The difference between nominal and real incomes is important as it is increases in real income (adjusted for inflation) that result in higher standards of living. But taxes are levied on our nominal incomes, regardless of inflation. Because of this difference, bracket creep means that real incomes after tax (otherwise known as disposable income) will actually fall.

What the PBO report projects

To calculate how much tax we will be paying in the future, the PBO first makes assumptions about inflation and real earnings growth and uses these to project individual incomes. Current income tax rates are then applied to these projected incomes, and the increased amount paid by each individual is added together.

According to the PBO’s modelling, the average individual tax rate will increase by 2.3% from 2017–18 to 2021–22. And every income group will see their tax rates increase over this period.

The largest tax increase is expected for individuals in the middle incomes, who have an average taxable of A$46,000 in 2017/18. This group are projected to face an increase in their average tax rate of 3.2% by 2021–22. Their average tax rate is expected to increase from 14.9% to 18.2%.

Meanwhile, those in the second lowest and two highest income quintiles are expected to see their average tax rate rise between 1.9% and 2.5%. The average tax rate for individuals in the lowest income group is projected to rise by only 0.2%, as most of their income remains below the tax free threshold.

https://datawrapper.dwcdn.net/P1y8u/4/

The increases in average tax rates are even greater if a comparison is made with 2016/17, the latest year for which individuals have been paying tax. As you can see in the previous chart, when compared to 2016/17, individuals in the middle income quintile will see their average tax rate rise by 3.8%.

As you can see, the largest burden of the tax brack creep will fall on “average Australians”. This is because they will see their nominal (before adjusting for inflation) incomes rise. Typically, the lowest income earners do not earn enough to get above the tax free threshold and the highest income earners already pay a large portion of their tax at the top marginal rates.

Because of increasing inflation and wage growth, the Parliamentary Budget Office projects that even the lowest income earners will be liable to pay income tax by 2019/20.

Heroic assumptions?

The 2% to 2.5% inflation assumed in PBO’s forecast is in the mid-point of the Reserve Bank’s target range of 2% to 3%, so this is not entirely unreasonable assumption.

But both PBO’s inflation and wage growth (2.5% to 3%) assumptions are currently way above the levels seen in the economy. According to the ABS annual inflation currently stands at just 1.8%, and the earnings of all Australian employees is growing at 1.6% per annum.

The reasons for persistent low inflation, not just in Australia but in most other industrialised countries, are not well understood or agreed upon.

And a number of theories have been put forward to explain low real wage growth including, the degree of underemployment, reduced job security, declining bargaining power of unions and increased potential competition, either from advances in technology or from international competition.

But regardless of the reasons for the persistently laggard growth in wages and inflation, there are also no signs that these rates will rise significantly any time soon, let alone to the levels assumed by the PBO.


Read more: Budget explainer: why is Australia’s wage growth so sluggish?


Given the information contained in the PBO report we can’t calculate exactly what the impact of these tax increases will be for individuals.

However, it is clear that if the current wage and price conditions persist the actual tax revenue will fall way short of the projected figures for all years up to and including 2021/22 and make a Budget balance even further off.

We can also make some extrapolations based on averages. As a simple example, consider someone on an annual income of A$84,000 in 2017/18 (which is around the current average earnings in Australia). Under the assumption that nominal incomes increase by only 2% per year, the tax paid (including Medicare levy) in 2020/21 would be A$23,158.

https://datawrapper.dwcdn.net/d9UIF/1/

However, if you compare this to nominal income growth of 5% (which is what the PBO assumes) the tax paid would be A$26,357 in 2020/21.

That is, tax collected from this individual would be 12% less under a low growth scenario than under the PBO’s more optimistic scenario. In the years 2018/19 and 2019/20 the tax collected would be respectively 4% and 8% less. This illustrates how precarious the projection of a balanced Budget in 2020/21 is.

The ConversationWhatever the outcome, it is for certain that income earners will see any nominal increases eroded not just by inflation, but also through bracket creep.

Phil Lewis, Professor of Economics, University of Canberra

This article was originally published on The Conversation. Read the original article.

Shorten promises $1 billion fund to finance manufacturing enterprises


Michelle Grattan, University of Canberra

Bill Shorten is promising that a Labor government would set up a A$1 billion fund to assist “advanced manufacturing”.

Modelled on the Clean Energy Finance Corporation (CEFC), which was established by Labor, the Australian Manufacturing Future Fund “will support innovative Australian manufacturing firms who want to grow their businesses and create jobs, but who might find it difficult to obtain private sources of finance”.

Shorten will make the announcement on Saturday in Adelaide. It comes as South Australia is hit by the shutdown of Holden’s car production plant there on October 20, with a loss of about 950 jobs. It also highlights the more interventionist policy approach being seen from both sides of politics.

A state where manufacturing struggles, SA faces an election early next year in which jobs and business opportunities will be issues. Last week’s announcement that Nick Xenophon will leave the Senate to lead a team of state candidate has thrown a wildcard into the poll.

Shorten and Shadow Industry Minister Kim Carr said in a statement that the proposed fund would help local manufacturers innovate and diversify. This could mean:

  • auto component manufacturers re-tooling or diversifying into other industries;

  • food manufacturers investing in new equipment for new products to export to Asia; and

  • metals fabricators expanding into pre-fabricated housing.

They said that an ALP government would ask the fund to give priority to considering “transformative investments in the automative manufacturing and food manufacturing sectors”.

Shorten and Carr quoted the Australian Industry Group saying that financial institutions were “downgrading manufacturing industries and making access to finance more difficult and expensive”.

“Labor won’t let the big banks hold Australian advanced manufacturing back,” they said.

The fund, which would not be financing large-scale enterprises, would partner with private finance to reduce the perceived risk in innovative projects. It would “apply commercial rigour” when investing and would offer financing in the forms of equity, concessional loans and loan guarantees. It would not make cash grants.

It might partner with the CEFC to invest in energy efficient projects and equipment to help with a business’ energy costs, or with the Export Finance and Insurance Corporation to access new export markets with new products.

The ConversationThe fund would be off-budget. It would be expected to be financially self- sufficient and achieve a benchmark rate of return across its portfolio.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.