Aug 12, 2011

Kohler: surplus stupidity and the case for delaying carbon tax …

We are about to get a lesson in the absurdity of political discourse: the government is going to be accused of "breaking a promise" if a global downturn prevents the budget from returning to surplus by 2013. Or if it delays the carbon tax.

Alan Kohler

Business Spectator editor-in-chief

We are about to get a lesson in the absurdity of political discourse: the government is going to be accused of "breaking a promise" if a global downturn prevents the budget from returning to surplus by 2013, or if it sensibly decides to put off the carbon tax. Not that this is anyone’s fault but theirs. Treasurer Wayne Swan yesterday started talking about the 2013 surplus as an “objective”, but let’s face it -- it was a promise. Swan and Prime Minister Julia Gillard unwisely signed it in blood and did not make it conditional. Obviously returning the budget to surplus as soon as possible is always a good idea, but unlike in Europe and the United States there is no imperative for the Australian government to reduce debt. They have also announced a carbon tax to start on July 1 next year that will have no impact on the budget, but still might not be a good idea anymore because it will represent a $2 billion wealth transfer from exporters to households. Maybe the currency will fall and give exporters a boost that will offset the cost of the tax and the coming recession in Europe and the US, maybe not. In normal life, we adjust according to circumstances. A company, for example, might decide to do something next year, but if things change the board will meet again and put it off. If they didn’t, they’d be sacked. In politics, however, there are only broken promises; if you make a sensible decision to change course because the wind is blowing a different way, you get pilloried instead of praised. Yesterday’s weak employment figures confirm what my colleague Robert Gottliebsen has been arguing for months: that the economy -- global and domestic -- is much weaker than anyone thought. Forcing the budget back into surplus by 2013 by cutting spending or raising taxes is probably a stupid idea, just as raising interest rates must now be off the agenda. But the opposition and the media will now ensure that the most important issue is not how the settings should be adjusted for changed circumstances, but whether the government breaks a promise. Same goes for the carbon tax. If Oliver Marc Hartwich in today’s Business Spectator roundtable is only half right about the dire future of the European Union and the euro, introducing a carbon tax next July would be the silliest idea imaginable. All three of the economists on the roundtable -- Hartwich, Warren Hogan of ANZ and Su-Lin Ong of RBC -- are pessimistic about the global economy. They are not alone. The very best that can be hoped for is that the European and American economies muddle through this new debt crisis and they end up with low growth rather than a recession. Last night, Bluescope Steel released a market update foreshadowing a $900 million write-down "given ongoing macroeconomic challenges". It is also reviewing "options to align … domestic steelmaking production capacity to Australia’s domestic market demand", which is obviously code for reviewing the operation of Port Kembla. This is the sort of thing shareholders expect from their directors and management, but apparently taxpayers expect nothing but blind allegiance to the previously announced strategy from politicians. That aside, Bluescope’s problems are a symptom of a wider malaise in domestic manufacturing and retailing, flowing from the elevated exchange rate and the slowdown in consumer spending because of the switch to saving. In the circumstances, should the government press on with the planned carbon tax next year? Of course not, unless there is some miraculous renaissance of the developed world economy between now and then. That looks extremely unlikely. Yet at a Town Hall forum in Perth yesterday, the prime minister vowed to press on with the carbon tax, because Treasury has advised that the economy will continue to grow even if it is imposed. Right. That’ll be the modelling then. That model on the computers in Langton Crescent, Parkes, in Canberra, a million or so miles from the real world. I think a greenhouse gas emissions trading scheme is desirable and inevitable, but what’s been happening lately in Europe and the US probably means it will take longer than expected for other countries to do it. In the circumstances it would be wise for the government to review its options, to borrow a phrase from Bluescope. Doing it next July is looking less and less like a good idea and, like the CEO of a business, the PM and treasurer should be sacked for NOT adjusting their plans. In the upside-down world of politics, however, you get sacked for being sensible. *This first appeared on Business Spectator

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41 thoughts on “Kohler: surplus stupidity and the case for delaying carbon tax …

  1. Jimmy

    The irony here is that in the boom times Howard administered he attempted no real tax reform (the GST was pre boom) and now we are actually trying to acheive something substantial the global economy turn to crap.
    However I feel that we have no choice but tp push on, delaying the carbon tax will be it’s death and we will have lost the opportunity for at least 5 years, plus with our economy tied to China and plenty of downward room to move on interest rates treasury predictions of growth aren’t unrealisitic.

  2. Son of foro

    We really have got ourselves into a mess with our stupid surplus fetish. Governments have a fiscal AND a social responsibility; focus too much on one and the other suffers.

    As a nation we’ve come to think that a surplus is in and of itself the sign of good government, regardless of our infrastructure needs, broader economic conditions etc. Government is a complex business, sometimes we need to be in surplus, sometimes we don’t. But most Australians have a juvenile understanding of the role of government based on nothing more than puerile slogans.

    Plus, as AK points out, our governments live in fear of changing their minds. Is Mr Abbott the only hope we have? After all, these are his (spoken) words:

    “Well, Laurie, when I made that statement, in the election campaign, I had not the slightest inkling that there would ever be any intention to change this. But obviously when circumstances change, governments do change their opinions, and that is actually the responsible course of action.”

    Luckily we live in a country with a strong independent media, one that reminds him of these words and stops him from calling people liars over and over and over again.

    The lucky country, indeed.

  3. GlenTurner1

    Alan, you are assuming that the current downturn is a short event. But this is really a continuation of the GFC. In which case it might yet have another five years to run, as asset prices slowly continue to deflate.

    If this is a long-run event then I really can’t see that the responsible action would be to delay the carbon tax. Sure, it’s a vast shame that our CO2 issue wasn’t dealt with during the boom years. But we are where we are, and if we don’t deal with CO2 then we are just storing up even more trouble for the future.

    You also have a very business-oriented view of the economy. Consider that the carbon tax is essentially redistributive from corporations to individuals. You’d think that would warm retailers’ cold little hearts, since corporations don’t shop at retail but individuals do.

    BlueScope’s problems are very much to do with the slump in commercial buildings. There’s little unemployment resulting from that, thanks to the Queensland floods, but residential housing uses much less steel than domestic housing.

    I think people are hard on the Australian people’s desire for surplus. There’s little doubt that the fiscal discipline that desire forces upon governments has served us well. Also that desire isn’t unconditional, the current deficit was acceptable because there was an exit plan. It’s the loss of that exit plan rather than a deficit itself that is causing the political heartache. The Australian public is also much more reasonable than then US public, where an inability to change any aspect of their taxation arrangements has lead to the US being unable to fund a reasonable level of basic government services.

  4. Michael Wilbur-Ham (MWH)

    I found it very sad to read the usually very sensible Alan Kohler say that of course the government should not go ahead with the carbon tax.

    Since the Stern report the economic impact of climate change, and the economic benefits of acting soon, have been made clear. And ever since the Stern report nothing significant has yet been done by any Australian government, and thus our emissions are continuing to rise.

    If we do nothing now to make a serious start in reducing emissions, we either have to do the impossible in future years to pay the price for no action now, or we are committing future generations to suffer the consequences and economic costs or our inaction.

    If a doctor says you have cancer, but with treatment you have a good chance of making a full recovery, would it be sensible to look at the economic situation today and tell the doctor that treatment now would be too disruptive, so you will come back later.

    If a year or too later (after deferring treatment) you went back to see the doctor you probably would not be surprised to learn that the cancer was much worse. But would you be surprised if the doctor told you that things are too late for effective treatment?

    Deferring action on climate change is the same. Those promoting this course of action should at least have the decency to point out that minor convenience now will have very long lasting bad economic consequences in the future.

  5. Jimmy

    Glen Turner – There is also this article which says bluescope and Onesteel would actually be better off under the carbon tax!!

  6. Rodger

    Please just defer the carbon tax until I win the lottery, then I won’t have to cut back on electricity use due to the extra few dollars cost per week.

  7. Michael Wilbur-Ham (MWH)

    Well if Labor wanted to reduce smoking they would:

    1 – Compensate the tobacco companies for lost sales

    2 – Increase the price of cigarettes by $2 per pack.

    3 – Give every smoker $2.20 per pack bought for compensation.

    4 – Act surprised when their anti-smoking legislation fails to reduce smoking.

  8. Jimmy

    MWH – If that was supposed to be a clever analysis of the carbon tax it just shows your lack of understanding.

    I also find it interesting that you clearly state we can not afford delay but you will only accept the “perfect” model of action which politically could/would not become legislation in the short term if ever.

  9. Jimmy

    Glen Turner – There is also this article which says bluescope and Onesteel would actually be better off under the carbon tax!!

  10. Jackol

    MWH – I was just thinking, on your first post, ‘hey I can agree with MWH for once’, and then you go and throw in:

    Well if Labor wanted to reduce smoking they would:

    1 – Compensate the tobacco companies for lost sales

    2 – Increase the price of cigarettes by $2 per pack.

    3 – Give every smoker $2.20 per pack bought for compensation.

    4 – Act surprised when their anti-smoking legislation fails to reduce smoking.

    as an analogy I can go along with #1 and #2, but #3 is simply wrong – the ALP might give smokers $2.20 per -average number of packs smoked pre-reform-, but not $2.20 per pack. The distinction is VERY important. If the smoker smokes the average number of packs after the tax/compensation, then they are basically in the same position, but if they choose to smoke less they can pocket the difference – ie they benefit financially from smoking less, similarly if they smoke more they will be penalized financially.

    Provided the compensation is not linked to the amount of undesired activity, there will be a differential where it is beneficial to reduce and a penalty to increase that activity.

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