I’m sick and tired of monetary policy and fiscal policy.
Monetary policy doesn’t make much difference anymore because these days the losers from a rate cut (older savers) almost equal the winners (younger borrowers), thanks to the ageing of the population and the high savings rate. And, in any case, the banks run almost as much monetary policy now as the RBA.
Actually, I can’t prove this but I suspect yesterday’s rate cut will have virtually no impact on the economy whatsoever. That’s because deposit rates will come down by 50 basis points, but bank lending rates will only fall by about 35 basis points. That means the slight preponderance of borrowers over savers on which monetary policy is based will be offset by the fact that the benefit to borrowers will be less than the loss to savers.
And fiscal policy no longer exists at all. It was used, briefly, to good effect during the GFC, but now “budget surplus” has once again become a slogan — nothing to do with economic policy, merely politics: a box to be ticked to create the appearance of economic credibility where none exists (this goes for both sides of politics).
What we should be talking about day in and day out, and more importantly doing something about, is energy policy. That’s because there is an actual crisis up ahead caused by politics, which must be resolved by politics.
Australia is suffering a capital strike against base load power generation. None has been built for many years and very little is proposed, and what little is proposed is being held up by political uncertainty.
The government’s Investment Reference Group last year estimated the total investment required on electricity generation, transmission and distribution at $240 billion between now and 2030, or $13 billion a year.
This at a time when more than that amount of money is also proposed to be spent on new resource projects for export. The competition for both labour and capital will be brutal.
The Clean Energy Future legislation, providing for a carbon tax from July 1 this year and an emissions trading scheme in 2015, is meant to provide certainty, after five years of madcap turmoil. But of course any policy from a government that’s polling 27% against an opposition promising to repeal that policy, is by definition, uncertain.
Actually, amend that: there is some certainty. It is certain to be repealed, in favour of … well, something that makes no sense. Tony Abbott has promised that he will call a double dissolution election when his repeal of the CEF legislation, presumably along with his own replacement bills, is blocked by the Senate, as it surely will be. That will add a few more months of uncertainty before capital will start flowing into electricity generation once more, assuming that the Coalition’s policy makes sense by then.
What will be needed from the next Coalition government is not just a climate change policy that makes sense, but a whole new energy white paper.
The Minister for Resources, Energy and Tourism, Martin Ferguson, released a draft paper last December, and there have been nearly 300 submissions about it so far. That draft is based on the current package of laws called Clean Energy Future.
If they’re all thrown out, as promised, then the new minister will have to start the process all over again. By the way, the shadow minister is Ian Macfarlane, who came within a bee’s willy of negotiating an emissions trading scheme in 2009 with the then minister, Penny Wong. Presumably he no longer believes in that crazy stuff.
Anyway, aside from whatever carbon abatement costs are imposed by either political party (they both have the same reduction target of 5% by 2020), electricity prices are already set to double by 2017 because of chronic under-investment in east coast transmission and distribution over previous decades.
This price increase cannot be avoided — it is already locked in. In fact, it will be greater than that if the 20% renewable energy target is to be met because renewable generation is always further away, so that transmission costs more.
The only antidote to the huge, looming increase in the price of electricity, not to mention the possibility of brownouts caused by the lack of investment in base load power, including nuclear, is energy efficiency.
Unless urgent action is taken, the rising price of power will destroy manufacturing and retail businesses far more effectively than the internet and the currency, which has a tendency to go down as well as up.
*This article was originally published at Business Spectator
I don’t agree that interest rate cuts will have no benefit on the economy because of the large number of savers. I would suggest (with no evidence mind you) that borrowers would have mcuh greater demands on their money as they typically have children and/or greater spending on discretionary goods.
This would lead to them not only spending more of the money saved but also lead to greater confidence and their improved confidence will also increase business confidence. This leads me to another point overlooked in Kohler’s assertion, business lending rates will be reduced as well.
I do agree though that Abbott’s energy policy makes no sense and anyone planning to vote for him should have a good hard look at it.
“it will be greater than that if the 20% renewable energy target is to be met because renewable generation is always further away, so that transmission costs more”
errrrr, my solar panels rooftops are *fairly close* to my house.
The Feed-in-Tariffs actually made some economic sense – by subsidising panels on houses power utilities avoid having to upgrade transmission networks just to meet the peak electricity load. The peak electricity load just happens to be in summer when air conditioners are switched on during long sunny days – exactly when solar panels reach their maximum output.
Maybe if the FiTs were continued, perhaps at a less generous rate, the need for huge power upgrades for the suburbs would be minimised. Kind of like a part-privatisation of the grid.
Do the Tories understand the economics of electricity or are they blinded by anti-green ideology?
Nice point in the 2nd comment about saving on infrastructure via (thermal?) solar installation, ie power stations on rooves. (I’m not technical but I understand photovoltaic solar has significant networking costs while solar thermal may not but at least the generation cost is less?)
Also I understand business are not as clever as they think they are at finding the efficiency dividends in energy efficiency/conservation. Apparently the Federal Dept of Energy Tourism and Resources have to coach business a fair bit and there is a win win for all concerned once pride is put to one side.
As far as double dissolution scenarios, Tony Windsor made some interesting comments about the numbers in the Coalition not being as certain as Tony Abbott might be posturing regarding any no confidence. So that puts us around 18 months or 2 years away – with the horror stories about a carbon tax just that – bad fairy stories for childen bedtimes.
on what do you base the assumption “renewable generation is always further away, so that transmission costs more” ???? – more likely renewables in future will be decentralised / local – heard of what they’re trying at Hepburn? there isnt only one economic model to follow here, we dont need to prop up energy as profit markets to exclusion of all else
@Limited News: While I agree up here in QLD, it doesn’t make sense in many of the southern states where the sun doesn’t shine so bright and heating is the primary cost. Feed in tariffs are certainly sensible policy, and obviously they are referring to utility owned renewables rather than private solar panels. I personally would like to see more investment in solar in northern areas and effectively crowd-source the grid. Especially for rental properties as renters are the ones who will benefit from it the most.
I think the reality, to supply baseload, we should be investing in safe 4th gen reactors such as pebble bed reactors in the short term and thorium LFTR tech long term. the disaster at Fukashima has put a stop to that despite most new designs being far safer and greener than any current tech.