In this series – Budget policy checks – we look at the government’s justifications for policies likely to be in this year’s budget and measure them up against the evidence.
In this piece we look at the need for personal income tax cuts.
A large proportion of any cut in personal income tax – especially if the cuts were skewed towards lower and middle-income households with a higher propensity to spend – would likely provide a greater direct stimulus to the Australian economy than an equivalent cut in company tax.
Cutting personal income taxes seems likely to provide much more of a boost to the Australian economy than cutting company income tax. As the government’s own published modelling shows, the benefits of its proposed cuts to the company income tax rate are small relative to their cost.
Do we need income tax cuts to provide relief from financial hardship?
The treasurer and I have been working on how we can provide more tax relief for hard-working middle income Australian families.
– Prime Minister Malcolm Turnbull
Over the last five years, household spending has grown by just 2.6% per annum in real terms, on average – of which more than half has been the result of population growth – compared with an average of 3.6% per annum over the preceding 12 years. Even with that lower growth rate in their spending, households have reduced their saving rate, from around 7% of disposable income five years ago to around 2.5% in 2017. That’s the lowest saving rate since before the financial crisis.
The key reason for this “squeeze” on household spending and saving is of course the ongoing weakness in the growth rate of household disposable income. Over the past five years, real per capita household disposable income has grown at an average annual rate of just 0.4%, compared with an average of 2.6% per annum over the preceding 12 years.
One reason for this is that Australian households have been paying an increasing proportion of their income in taxes. In the years prior to the onset of the financial crisis, almost every budget included personal income tax cuts in some form or other.
By contrast, there have been no changes to Australia’s personal income tax scale since 2008 – apart from the increase in the tax-free threshold (paid for by an increase in the bottom rate) in 2012, the temporary surcharge on top-rate taxpayers which applied between 2014-15 and 2016-17, and the increase in the threshold for the second-top rate (from A$80,000 to A$87,000) which took effect in the 2016-17 financial year.
As a result, in 2017, Australian households in aggregate paid 19.5% of their taxable incomes in income and other direct taxes – the highest proportion since 2005, and continuing a steady rise since 2011.
Households are also spending almost two and a quarter percentage points more of their after-tax disposable incomes on education, health, insurance and other financial services, and utilities than they did five years ago.
Given all this, it’s little wonder that household spending in more “discretionary” areas has been so weak in recent years.
Well-targeted personal income tax cuts could thus help to ameliorate this multi-faceted “squeeze” on household incomes, and provide a direct boost to the economy.
Do we need income tax cuts to make up for the fact that we haven’t had a pay rise in a while?
It’s been a long time since any Australians had a decent pay rise…this is a real pressure on Australians…we can give them some relief when it comes to their personal income tax.
– Treasurer Scott Morrison
The other major reason for the very slow growth in real household disposable income over the past few years has been the unprecedented slowdown in wages growth. Wages have risen at an average annual rate of just 2.2% over the past five years (only 0.3 of a percentage point above the inflation rate), down from 3.7% per annum over the preceding 12 years.
Although, as RBA Governor Phillip Lowe noted in a speech that “the latest data suggest that the rate of wages growth has now troughed”, he went on to warn that the pickup which the RBA expects “is likely to be only gradual”.
Recent experience in other advanced economies clearly suggests that the unemployment rate needs to be lower for longer than in previous business cycles before wages growth starts to pick up. So even assuming that Governor Lowe is right, it may be one or two years before Australian households can expect any meaningful improvement in their financial position from faster growth in their wages or salaries.
Well targeted personal income tax cuts could help provide at least some offset to this likely continuing stagnation in wages growth over the next year or so.
What’s the verdict?
Targeted personal income tax cuts could reduce the squeeze on households and make up for persistent low wages.
Of course, it remains crucial that any cuts in personal income tax be sustainable – that is, that they are not funded by bigger deficits, and do not materially detract from the task of putting the nation’s public finances on a sounder footing. This is so we are better placed to withstand any unforeseen economic shocks.
And it’s important to remember that government spending has moved to what appears to be a permanently higher level as a proportion of GDP since the financial crisis. The government’s underlying cash payments averaged 25% of GDP from 2011-12 through 2017-18, up from 24% from 2001-02 through 2007-08. That also represents a constraint on the scope for tax cuts.
However, the apparently greater improvement in the budget so far this financial year, compared with what was forecast as recently as last December’s Mid-Year Economic and Fiscal Outlook, could give the government a little more latitude for financially sustainable personal income tax cuts in the upcoming budget.
Perhaps the most sustainable way of providing the “relief” which the treasurer says many Australian households need, would be to abandon the tax cut for companies turning over more than A$50 million a year. The government hasn’t been able to get these through the Senate. These cuts would do far less to boost the Australian economy than well-targeted personal income tax cuts of a similar order of magnitude.
After a tumultuous 2017 election and six months of political uncertainty, Germany finally has a government. The so-called “grand coalition” made up of the centre-right Christian Democrats (CDU), its right-wing sister party, the Christian Social Union (CSU), and the centre-left Social Democrats (SPD), will govern Germany for the next four years.
The agreement explains “a new direction for Europe, a new dynamic for Germany, a new cohesion for our country”. It notes two changes in German leadership: a change in the power dynamics among the ruling parties, and a strong emphasis on using the European Union (EU) to achieve German political objectives.
With a weakened CDU under Chancellor Angela Merkel ceding considerable control to the anti-immigration CSU and the socialist SPD, the centre of German political power has shifted. This shift will have a profound impact on German and EU refugee policies.
The issue of refugees is discussed deeply in German society. Since the height of the refugee crisis in 2016, when 722,370 people applied for asylum in Germany, the number of asylum applicants has decreased significantly.
At first, Merkel gained praise for her humanitarian, liberal refugee policy focused on refugee reception and integration. However, growing anti-immigrant sentiment, evident in the rise of groups like Patriotic Europeans Against the Islamisation of the West (PEGIDA), the electoral success of the far-right Alternative for Germany (AfD) and the difficulties in integrating a large number of refugees all resulted in increasingly protectionist sentiment.
Given Merkel’s weakened position in the coalition, it is not clear that Germany will continue her humanitarian approach.
The government faces two leadership challenges in refugee policy. Firstly, it needs to provide Germany with a feasible refugee policy that is manageable and does not split the coalition. Secondly, it is attempting to lead a different type of coalition – namely, the EU’s 28 member states.
In domestic refugee policy, Germany is fractured. Of the three coalition partners, the anti-immigration CSU is the primary winner in migration and refugee policy. CSU leader and Interior Minister Horst Seehofer is leading dramatic restrictions in refugee policy. Although the SPD negotiated a modest victory with 1,000 family reunification visas per month for refugees, government parties are refusing to do more than this.
Creating a cap on refugee visas was a major point of controversy between the CDU and CSU. The CSU prevailed, with the coalition agreement calling for an annual cap of 180,000-220,000 refugees. However, that cap may not take effect as only 198,317 first-time asylum applications were filed in Germany in 2017. Yet this threshold creates distraction from Merkel’s humanitarian approach as it prioritises immigration control over humanitarian obligation.
This, coupled with the limitations on movement of refugees imposed by centralised processing centres and repatriation centres for failed asylum seekers, demonstrates new constraints in refugee policy. This in turn demonstrates the CDU’s diminishing power and the fracturing of the centre of policy leadership.
Yet there is some good news for refugee integration. The grand coalition still maintains a focus on refugee integration, especially through language acquisition and participation in the labour market.
As Germany struggles with its fractured leadership and seeks consolidation and centralisation of refugee processing procedures, the German approach is becoming increasingly binary: if you are not a refugee, you must leave; if you are a refugee, you must integrate.
When it comes to the EU, the grand coalition government has four objectives: halt secondary movement of refugees; toughen the EU’s external borders; tackle external push factors; and create a robust mechanism for responsibility-sharing.
The Common European Asylum System aims for common application procedures for refugees and accommodation standards to prevent asylum-shopping across countries. The German government is also renewing calls for a quota-based refugee redistribution and resettlement scheme among EU states.
In calling for increased policing of the EU’s external borders and a common approach to push factors, these mechanisms paint refugee protection as a security issue rather than a humanitarian one.
The EU is deeply divided on refugee policy and distracted by other concerns. The United Kingdom is consumed by Brexit negotiations, while many eastern and central European states refuse to participate in EU-level refugee resettlement schemes.
The anti-refugee populist parties have increased influence across Europe. Merkel has few natural allies, if any, in the grand coalition or within the EU on this issue.
SA-Best, led by high-profile former senator Nick Xenophon, has announced its gambling policy ahead of next month’s South Australian election. Xenophon has backed away from the “no pokies” policy that characterised his earlier approach to gambling reform. However, the evidence behind his party’s proposed suite of measures is reasonably strong.
What’s in the policy?
Key aspects of SA-Best’s proposal are:
a five-year plan to cut poker machines numbers in South Australia from 12,100 to 8,100;
a reduction in maximum bets to A$1, from the current $5;
a reduction in maximum prizes from $10,000 to $500;
The policy is targeted at commercial hotel operators; clubs, “community hotels” and the casino are exempt from the reduction provisions.
There are also proposals to cut trading hours from 18 to 16 per day, with the introduction of a seven-year pokie licence for venues, from January 1, 2019. Increased resources would go to counselling and support for those with gambling problems.
Notably absent from the policy is the introduction of a pre-commitment system, which would enable pokie users to decide in advance how much they want to spend. Along with $1 maximum bets, this was a key recommendation of a Productivity Commission inquiry in 2010.
The policy has attracted the expected response from the gambling industry. The Australian Hotels Association argued the changes would “rip the guts” out of the gambling industry and attack the “26,000 jobs” it claims the industry directly creates.
Does evidence support SA Best’s policies?
We’ve known for some time that reducing maximum bets is likely to reduce the amount wagered by people experiencing severe gambling problems. This in turn reduces the harm they suffer.
Reducing maximum prizes reduces “volatility”, meaning pokies may have more consistent loss rates.
Reducing access to pokies is also an important intervention, since easy access is a key risk factor for developing a gambling problem. Reducing the number of machines, and the hours they are accessible, support this.
However, very substantial cuts in pokie numbers are needed to meaningfully reduce harm. A cut of the magnitude SA-Best proposes may not be sufficient to prevent those with serious gambling habits from readily accessing pokies. This is because pokies are rarely fully utilised at all times of the week.
Removing easy access to cash has also been identified as an important harm-reduction intervention. This had a positive initial effect in Victoria (especially among high-risk gamblers), when ATMs were removed from pokie venues in 2012.
The harms associated with gambling generally affect far more people than just the gambler. The most recent study, from 2012 indicates that 0.6% of the SA adult population is classified as at high risk of gambling harm, 2.5% are classified as at moderate risk, and another 7.1% at low risk.
Based on census data, this equates to about 8,000 South Australians experiencing severe harm from gambling. Another 33,100 are experiencing significant harm, and about 94,000 are experiencing some harm.
However, each high-risk gambler affects six others; each moderate-risk gambler affects three others; and each low-risk gambler one other. So, the problems of each high-risk gambler affect another 47,660 South Australians. These are children, spouses, other relatives, friends, employers, the general community via the costs of crime, and so on.
Another 99,300 are affected by moderate-risk gambling, and another 94,000 by low-risk gambling. All up, this amounts to 241,000 people.
Of these, 190,000 are affected at high or significant levels. These harms include financial disaster and bankruptcy, divorce or separation, neglect of children, intimate partner violence and other violent crime, crimes against property, mental and physical ill-health, and in some cases, suicide.
Most gambling problems (around 75%) are related to pokies, and by far the greatest expenditure goes through them. Nothing has changed in this regard since the Productivity Commission identified this in 2010.
In this context, SA-Best’s policy has substantial justification.
For Tasmania, the costs of gambling can be estimated at about $342 million per year. This is more than three times as much as the total tax take from all gambling in the state.
A similar calculation for South Australia suggests its overall costs of problem gambling are more than $1.6 billion per year. This is more than four times the total taxes from gambling the South Australian government derived in 2015-16 ($380.3 million).
With a cost-benefit ratio like that, some strong measures could well be called for. Xenophon says the proposals encapsulated in his party’s policy are the start. However, Tasmanian Labor has set the new benchmark for pokie regulation – removing them entirely from pubs and clubs.
It is remarkable that a party traditionally in lockstep with – and substantially supported by – the gambling industry has adopted such a position. Perhaps the harms have become too much to ignore?
How these policies might be implemented, amid the resistance they will face from a well-heeled and often-influential gambling industry, presents an intriguing prospect over coming months.
For Bill Shorten, Tuesday’s National Press Club speech was the easy start to what could be a tougher year than 2017. The address had a popular “announceable” – a proposed National Integrity Commission – and it homed in on fertile electoral ground: cost-of-living pinches, flat wages, and high health insurance costs.
But it left a heap of gaps to be filled in on what precisely are Labor plans to ease the pressures many people are feeling, and questions about its ability to convince voters that it can in fact relieve them.
Politically, Shorten could hardly go wrong with the integrity commission, pitched to tapping into the epidemic of mistrust that’s corroding the political system.
Shorten was blunt: he didn’t know of any particular instances of corruption that are demanding address. It is about restoring “people’s faith in their representatives and the system”, restoring “trust, accountability and transparency in the public sector”.
In other words, the commission is an institutional response to what has become a hugely bad vibe in our democracy.
Malcolm Turnbull on Tuesday left open the possibility of endorsing an integrity commission of some sort, while pointedly noting “obviously, in anything like that the devil will always be in the detail”.
Within his ranks there is resistance to doing something robust. Barnaby Joyce, for one, thinks it could unnecessarily restrict ministers. “You’ll be terrified to make a decision that’s different to your department,” he said, with perhaps revealing frankness.
For a long time the major parties did not believe that the objective circumstances required a federal ICAC. Now it is a matter of the public mood. And once Shorten decided to embrace the idea of a commission – probably with one eye on the looming Batman byelection, where the Greens pose an existential threat to the ALP – the government finds itself pushed towards doing the same.
But come election time, votes won’t turn on an integrity commission. They will turn on such issues as cost of living, discontent with flat wages, and health. The parties don’t need focus groups to tell them that, though no doubt the groups are sending the message.
As did Tuesday’s Essential poll (which had Labor leading 54-46% in two-party terms). The numbers show Shorten is playing to ALP’s strengths: 40% trust Labor most to handle industrial relations, compared to 27% who favour the Liberals; 39% trust Labor most to ensure the quality of Australia’s health system but only 28% nominate the Liberals.
People’s perception of a squeeze on their living costs is stark. Asked “in the last two years, do you think your and your household’s income has gone up more than the cost of living, fallen behind or stayed even with the cost of living”, 51% said fallen behind, 28% said stayed even, and 14% said gone up more.
On health, 83% agreed “the government should do more to keep private health insurance affordable”.
Shorten didn’t hold back on the problems. “The wages system is not delivering, and it’s not just cuts to penalty rates, or the exploitation of labour hire,” he said. “Enterprise bargaining is on life support.”
Workers needed pay rises. Labor would “put the bargaining back into enterprise bargaining”.
The minimum wage was no longer a “living wage”. “Our goal should be a real, living wage – effectively raising the pay of all Australians, particularly the 2.3 million in the award system.”
“Yes, we must always be mindful of the capacity of industry to pay. But let me make it clear: we need to fix the disconnect between wages and productivity.”
Much of the detail of how all this is to be done is yet to unfold. Labor has flagged that it would attack the ability of companies to unilaterally terminate agreements. It promises to restore Sunday penalty rates and have a national push to close the gender gap.
But if it wants to significantly raise the “living wage” that could be a big policy challenge and certainly lead to tensions with business, which was twitchy after Shorten’s speech.
Meanwhile medium-sized businesses (with turnovers of more than A$2 million and under A$50 million annually) are still on tenterhooks waiting for Labor to clarify what it will do with the company tax cuts already legislated for them. Shorten in the question-and-answer session said Labor would finalise its position after the budget. It was the first time he had spelled out this timetable.
On health, Labor knows that it can get people’s attention by empathising with their discontent about the rising cost of private insurance, but remains vague about how it would tackle the issue.
Shorten said he put the big operators on notice that “business as usual doesn’t work”.
“If you are getting a $6 billion subsidy from the taxpayer yet you’re making record profits, yet the prices are going up and the exclusions are going up, well that’s a problem.”
The opposition was working though “options” and would talk to the funds. Certainly there needed to be “better monitoring of exclusions”, he said.
Shorten’s reference to subsidies triggered some speculation that Labor might cut the rebate for private health insurance. This was ill-based and quickly quashed. After all, as Labor pointed out, if you’re talking about containing costs to consumers of private health cover, you wouldn’t be reducing the rebate.
Turnbull will deliver his 2018 opening-salvo speech on Thursday. He has chosen to make it in regional Queensland rather than in Canberra, getting out of the beltway and bypassing the national media pack.
As we see each year, funding is likely to dominate the headlines as major reforms across the early childhood, school, Vocational Education and Training (VET) and higher education sectors will be implemented.
In 2017, federal early years education policy was dominated by changes to child care subsidies. The primary narrative was around affordability of child care and enabling parents’ workforce participation.
The international evidence base shows offering a second year of universal preschool can have a substantial impact on children’s learning. Unlike many of our peer countries, Australia has yet to embrace this opportunity. But we hope policy-makers progress towards scoping and running pilot programs.
Recent US research adds to the body of evidence supporting the positive long term impacts quality early learning can have on educational, social and health outcomes. In particular, researchers are starting to demonstrate these effects in state-based universal provision of early learning.
Early childhood educators play a pivotal role in supporting young children’s emerging skills, and are key to lifting quality in early education. Some of the most pressing policy work in early learning is in workforce strategy, ensuring improved conditions, and supporting educators to develop and share the knowledge and skills they need to improve children’s learning experiences.
Testing will continue to dominate discussions in early 2018, with the Australian government continuing to attempt to persuade state governments to adopt a year one phonics screening. This would be a five to seven minute session one-to-one with a teacher to assess reading. Whether the screening is adopted will be dependant to a degree on the outcome of state elections.
Expect to hear a lot more about the Gonski 2.0 review this year, as the report is delivered to government in March.
Major reviews are also due out from the newly established Schools Resourcing Board, firstly into calculation of socio-economic status (SES) scores, and then loadings for students with disability.
The SES review is currently underway to assess the extent to which the current approach properly measures the capacity of parents to contribute financially towards the resource requirements of non-government schools. The board is tasked with making recommendations on the changes or alternative approaches needed to ensure confidence in the process. Public submissions on the issues paper are open until 20 February.
The Melbourne Declaration is primed for a renewed look. In 2008, the Declaration set aspirational goals for education around equity, excellence and ensuring all students are “successful learners, confident and creative individuals, and active and informed citizens”.
Yet, in the decade since we have failed to establish effective system-wide strategies for meeting and measuring these aspirations. Measuring all students along a singular ranking, as we do with the ATAR at the end of Year 12, may reflect to some degree who is a successful learner, but isn’t a strong reflection of these broader outcomes.
If these are the goals we continue to aspire to, then measuring students against them is a must. The general capability strands in the Australian curriculum provide a promising path and we hope to see sustained support for schools to cultivate these capabilities in their students.
There is an obvious disjuncture in policy approaches towards VET and higher education which has seen the VET sector go backwards in recent years. Projected employment growth is equally strong for people with vocational qualifications as university degrees.
Both sectors play a critical in training a high calibre workforce. So, policy and funding conversations should consider the two sectors as part of a different but connected system. In 2018, we’d like individual students to be able to see potential pathways for themselves and their aspirations in our tertiary education and training system.
France recently appointed a tech ambassador to the Silicon Valley. French President Emmanuel Macron named David Martinon as “ambassador for digital affairs”, with jurisdiction over the digital issues that the foreign affairs ministry deals with. This includes digital governance, international negotiations and support for digital companies’ export operations.
The appointment is part of France’s international digital strategy, which is becoming a focus of its foreign policy. And France isn’t alone in doing this.
In early 2017, Denmark appointed a “TechPlomacy” ambassador to the tech industry. Casper Klynge is possibly the first-ever envoy to be dispatched to Silicon Valley with a clear mandate to build better relationships with major technology firms.
Some of these global players are also influential policy actors in their own right. In 2016, Foreign Policy presented its Diplomat of the Year Award to Eric Schmidt, executive chairman of Google parent company Alphabet Inc. The award was in recognition of Google’s contributions to international relations through empowering citizens globally.
What’s different about TechPlomacy?
The recent ambassadorial appointments signify not only the important socio-economic and political roles of technology, but also how diplomacy is evolving and adapting to the disruptive changes in our societies.
These developments mark the prominence of tech-cities on the global scene. Nation states are no longer the only players in international affairs; cities are also taking centre stage.
As opposed to lobbying governments in the world’s capitals, the new breed of diplomats will target tech-cities with multi-trillion-dollar technology sectors. They will also rub shoulders and nurture a direct dialogue with organisations that have gigantic economic impacts. In 2016, for example, Google helped to inject US$222 billion in economic activity in the US alone.
The so-called “Google ambassadors” won’t be targeting Silicon Valley only. The Office of Denmark’s Tech Ambassador has a team with physical presence across three time zones in North America, Europe and Asia. It will also connect with tech hubs around the world.
As part of an interconnected planet, these tech hubs will increasingly play a more active role in the global economy. Decision-makers are starting to recognise the imperative to establish good relationships and understand the tech giants’ policies and agendas.
… [C]ities rather than states or nations are becoming the islands of governance on which the future world order will be built.
He also suggests that connectivity through an expanding matrix of infrastructure (64 million kilometres of roads, 4 million kilometres of railways and 1 million kilometres of internet cables) will far outweigh the importance of 500,000 kilometres of international borders.
Still more questions than answers
As more cities assert their leadership on the world stage, new mechanisms and networks (e.g. C40 Cities) could emerge. That could signal a new generation of diplomacy that relates and engages with cities rather than bilateral collaboration between nations.
Although these new diplomatic outposts have generated some profound interest, questions remain.
Will this era of tech diplomacy create collaborative ways to develop and achieve foreign policy priorities? Will it increasingly become a unifying global priority?
Do these appointments signify a transformation in international relationships? Will big tech companies also develop diplomatic capacities?
And will we witness the emergence of a post-national ideology of civic-ism, whereby people’s loyalty to the city surpasses that to a nation?
What comes next?
Not everyone will be excited by these appointments. Many would downplay their significance. Others would argue that tech companies have been engaged globally for years, and that they do this anyway as part of their “business as usual” activities.
Whether you embrace or object to it, a new world order is emerging around cities and their economies, rather than nations and their borders. These cities may ultimately chart pathways to their own sovereign diplomacy and formulate their own codes of conduct.
It is anyone’s guess whether the future will bear any resemblance to TechPlomacy or something else we haven’t yet imagined. The significance of these appointments will become clearer as the envoys go to work and we begin to understand the possibilities.
But for most Australians, the most visible impact of this crisis has been their ever-increasing electricity bills. Electricity prices have become a political hot potato, and the blame game has been running unchecked for more than a year.
Electricity retailers find fault with governments, and renewable energy advocates point the finger at the nasty old fossil-fuel generators. The right-wing commentariat blames renewables, while the federal government blames everyone but itself.
The truth is there is no silver bullet. No single factor or decision is responsible for the electricity prices we endure today. Rather, it is the confluence of many different policies and pressures at every step of the electricity supply chain.
Four components make up your electricity bill. Each has contributed to this increase.
The biggest culprit has been the network component – the cost of transporting the electricity. Next comes the retail component – the cost of billing and servicing the customer. Then there is the wholesale component – the cost of generating the electricity. And finally, the government policy component – the cost of environmental schemes that we pay for through our electricity bills.
Each component has a different tale, told differently in every state. But ultimately, this is a story about a decade of policy failure.
Network costs form the biggest part of your electricity bill. Australia is a big country, and moving electricity around it is expensive. As the graph above shows, network costs have contributed 40% of the total price increase over the past decade.
The reason we now pay so much for the network is simply that we have built an awful lot more stuff over the past decade. It’s also because it was agreed – through the industry regulator – that network businesses could build more network infrastructure and that we all have to pay for it, regardless of whether it is really needed.
Network businesses are heavily regulated. Their costs, charges and profits all have to be ticked off. This is supposed to keep costs down and prevent consumers being charged too much.
That’s the theory. But the fact is costs have spiralled. Between 2005 and 2016 the total value of the National Electricity Market (NEM) distribution network increased from A$42 billion to A$72 billion – a whopping 70%. During that time there has been little change in the number of customers using the network or the amount of electricity they used. The result: every unit of electricity we consume costs much more than it used to.
There are several reasons for this expensive overbuild. First, forecasts of electricity demand were wrong – badly wrong. Instead of ever-increasing consumption, the amount of electricity we used started to decline in 2009. A whole lot of network infrastructure was built to meet demand that never eventuated.
Second, governments in New South Wales and Queensland imposed strict reliability settings – designed to avoid blackouts – on the networks in the mid-2000s. To meet these reliability settings, the network businesses had to spend a lot more money reinforcing their networks than they otherwise would have.
Third, the way in which network businesses are regulated encourages extra spending on infrastructure. In an industry where you are guaranteed a 10% return on investment, virtually risk-free – as network businesses were between 2009 and 2014 – you are inclined to build, build, build.
The blame for this “gold-plating” of network assets is spread widely. Governments have been accused of panicking and setting reliability standards too high. The regulator has copped its share for allowing businesses too much capital spend and too high a return. Privatisation has also been criticised, which is slightly bizarre given that the worst offenders have been state-owned businesses.
The second biggest increase in your bill has been the amount we pay for the services provided to us by retailers. Across the NEM, 26% of the price increase over the past decade has been due to retail margins.
This increase in the retail component was never supposed to happen. To understand why, you must go back to the rationale for opening the retail sector to competition. Back in the 1990s, it was felt that retail energy was ripe for competition, which would deliver lower prices and more innovative products for consumers.
In theory, where competition exists, firms seek to reduce their costs to maximise their profits, in turn allowing them to reduce prices so as to grab as many customers as possible. The more they cut their costs, the more they can cut prices. Theoretically, costs are minimised and profits are squeezed. If competition works as it’s supposed to, the retail component should go down, not up.
But the exact opposite has happened in the electricity sector. In Victoria, the state that in 2009 became the first to completely deregulate its retail electricity market, the retail component of the bill has contributed to 36% of the price increase over the past decade.
On average, Victorians pay almost A$400 a year to retailers, more than any other mainland state in the NEM. This is consistent with the Grattan Institute’s Price Shock report, which showed that rising profits are causing pain for Victorian electricity consumers. Many customers remain on expensive deals, and do not switch to cheaper offers because the market is so complicated. These “sticky” customers have been cited as the cause of “excessive” profits to retailers.
But the new figures provided by the ACCC, which come directly from retailers, paint a different picture. The ACCC finds that the increase in margins in Victoria is wholly down to the increasing costs of retailers doing business.
There are reasons why competition might drive prices up, not down. Retailers now spend money on marketing to recruit and retain customers. And the existence of multiple retailers leads to duplications in costs that would not exist if a single retailer ran the market.
But these increases should be offset by retailers finding savings elsewhere, and this doesn’t seem to have happened. History may judge the introduction of competition to the retail electricity market as an expensive mistake.
So far, we have accounted for 65% of the bill increase of the past decade, and neither renewables nor coal have been mentioned once. Nor were they ever likely to be. The actual generation of electricity has only ever formed a minor portion of your electricity bill – the ACCC report shows that in 2015-16 the wholesale component constituted only 22% of the typical bill.
In the past year, however, wholesale prices have really increased. In 2015-16, households paid on average A$341 a year for the generation of electricity – far less than they were paying in 2006-07. But in the past year, that is estimated to have increased to A$530 a year.
Generators, particularly in Queensland, have been engaging in questionable behaviour, but it is the fundamental change in the supply and demand balance that means higher prices are here to stay for at least the next few years.
The truth is the cost of generating electricity has been exceptionally low in most parts of Australia for most of the past two decades. When the NEM was created in 1998, there was arguably more generation capacity in the system than was needed to meet demand. And in economics, more supply than demand equals low prices.
Over the years our politicians have been particularly good at ensuring overcapacity in the system. Most of the investment in generation in the NEM since its creation has been driven by either taxpayers’ money, or government schemes and incentives – not by market forces. The result has been oversupply.
Up until the late 2000s the market kept chugging along. Then two things happened. First, consumers started using less electricity. And second, the Renewable Energy Target (RET) was ramped up, pushing more supply into the market.
Demand down and supply up meant even more oversupply, and continued low prices. But the combination of low prices and low demand put pressure on the finances of existing fossil fuel generators. Old generators were being asked to produce less electricity than before, for lower prices. Smaller power stations began to be mothballed or retired.
Something had to give, and it did when both Alinta and Engie decided it was no longer financially viable to keep their power stations running. Far from being oversupplied, the market is now struggling to meet demand on hot days when people use the most electricity. The result is very high prices.
A tight demand and supply balance with less coal-fired generation has meant that Australia increasingly relies on gas-fired generation, at a time when gas prices are astronomical, leading to accusations of price-gouging.
Put simply, Australia has failed to build enough new generation over recent years to reliably replace ageing coal plants when they leave the market.
Is it renewable energy’s fault that coal-fired power stations have closed? Yes, but this is what needs to happen if we are to reduce greenhouse emissions. Is it renewables’ fault that replacement generation has not been built? No. It’s the government’s fault for failing to provide the right environment for new investment.
The current predicament could have been avoided if we had a credible and comprehensive emissions reduction policy to drive investment in the sector. Such a policy would give investors the confidence to build generation with the knowledge about what carbon liabilities they may face in the future. But the carbon price was repealed in 2014 and replaced with nothing.
We’re still waiting for an alternative policy. We’re still waiting for enough generation capacity to be built. And we’re still paying sky-high wholesale prices for electricity.
Green and gold
Finally, we have the direct cost of government green schemes over the past decade: the RET; the household solar panel subsidies; and the energy-efficiency incentives for homes and businesses.
They represent 16% of the price increase over the past 10 years – but they are still only 6% of the average bill.
If the aim of these schemes has been to reduce emissions, they have not done a very good job. Rooftop solar panel subsidies have been expensive and inequitable. The RET is more effective as an industry subsidy than an emissions reduction or energy transition policy. And energy efficiency schemes have produced questionable results.
It hasn’t been a total waste of money, but far deeper emissions cuts could have been delivered if those funds had been channelled into a coherent policy.
The story of Australia’s high electricity prices is not really one of private companies ripping off consumers. Nor is it a tale about the privatisation of an essential service. Rather, this is the story of a decade of policy drift and political failure.
Governments have been repeatedly warned about the need to tackle these problems, but have done very little.
Instead they have focused their energy on squabbling over climate policy. State governments have introduced inefficient schemes, scrapped them, and then introduced them again, while the federal government has discardedpolicies without even trying them.
There is a huge void where our sensible energy policy should be. Network overbuild and ballooning retailer margins both dwarf the impact of the carbon price, yet if you listen only to our politicians you’d be forgiven for thinking the opposite.
And still it goes on. The underlying causes of Australia’s electricity price headaches – the regulation of networks, ineffective retail market competition, and our barely coping generators – need immediate attention. But still the petty politicking prevails.
The Coalition has rejected the Clean Energy Target recommended by Chief Scientist Alan Finkel. Labor will give no guarantee of support for the government’s alternative policy, the National Energy Guarantee. Some politicians doubt the very idea that we need to act on climate change. Some states have given up on Canberra and are going it alone.
We’ve been here before and we know how this story ends. Crisis wasted.
As we approach the end of the year, it’s useful to look back and forward. Now is an auspicious time, as two major energy-related reports have been released this week: the federal government’s review of their climate change policies, and a discussion paper from the Australian Energy Market Operator (AEMO) on future energy paths.
The difference between the two is striking. The AEMO paper is practical, direct and realistic. On the other hand, the climate policy review relies essentially on Australia buying lots of international carbon permits to meet our Paris target (and, implicitly, on state governments taking up the challenge their Canberra colleagues have largely abanondoned).
It’s amusing to read a document that plays with numbers in such creative ways. But it is a fairy story, and it’s no way to drive national climate policy.
But things have in fact shifted a long way – the revolution is accelerating and unstoppable. The federal government is almost irrelevant; the public statements and policies it presents are simply aimed at getting “something” through the Coalition party room, or trying to throw blame on others. It’s very sad.
The real games are being played out within state governments; in battles between energy policy agencies and regulators; by emerging industry players who do not even have formal roles in energy legisation; and by business and the community as they defend themselves from the failures around them by implementing “behind the meter” solutions and working together.
The real heavy lifters
Medals of Valour should be awarded to Chief Scientist Alan Finkel, AEMO chief executive Audrey Zibelman, and South Australian Premier Jay Weatherill.
The government’s response to this year’s Finkel Review showed that no amount of compromise would allow a sensible energy and climate policy to pass through the minefield of the Coalition party room. Prime Minister Malcolm Turnbull and Environment and Energy Minister Josh Frydenberg, both of whom know what they need to do, simply have too little political capital within that place to drive realistic energy policy.
But the Finkel Review also successfully recommended many changes that will help to fix the physical operation of the grid. Innovation and the laws of physics have finally begun to triumph over market politics and ideology.
AEMO worked out a way to get around the glacial and obstructive tactics of the Australian Energy Market Commission on demand-side action by setting up a “pilot project” to drive demand response. It has been clear for decades that this is a very cost-effective tool. Zibelman has been a voice of practical reality and clear understanding of the future of energy, including the demand side, and AEMO’s future energy paths reflects that.
Weatherill has weathered a storm of abuse over his state’s innovative energy strategy. His government has shown how a diversified approach can transform an energy system in little more than a year. But he needs to put more effort into long term energy efficiency and energy productivity improvement measures integrated with renewables and storage, to reduce pressure on electricity systems over time. For example, home cooling comprises a third of South Australia’s peak electricity demand, but could be slashed by efficient buildings and cooling equipment.
What lies ahead
Looking forward, the coming year will be shaped by some key issues, some of which are already playing out at a frenetic pace. Consider a small sample of many recent events:
As mentioned, AEMO has released a discussion paper framing a very different electricity future, and including a low-carbon scenario.
The Victorian Essential Services Commission has proposed a new “time of day” feed-in price for rooftop solar that reaches 29 cents per kilowatt-hour in afternoons and evenings. If approved, this will be a game-changer, as adding battery storage to rooftop solar will become far more attractive.
Meanwhile the federal government has released energy modelling to underpin ongoing negotiation on the National Energy Guarantee (NEG) that is simply irrelevant and embarrassing. The Energy Security Board’s involvement in this has undermined perceptions of its independence, especially when it is contrasted with the vision AEMO is discussing in its paper.
While the states have agreed to continue discussion on the NEG in April, there are some major hurdles. Primarily, states must be allowed to set and achieve their own energy targets: the federal energy minister has put the blame for problems on the states, and they now have to be seen by their voters to act.
Second, the design must ensure it does not give the dominant energy companies even more power to distort markets. Some members of the Energy Security Board seem to understand the challenges, and are optimistic they can be overcome. Time will tell.
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.
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.
But if there is an impasse with the states and the plan is poorly received by the public, the “climate wars” could become hotter.
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.
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.
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.
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.
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.
It 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.