‘Backflipping’ to credible policies is good politics

Credible economic policies seem largely to have gone missing in Australia. Resource taxation, environmental policy, and a robust Budget deficit reduction strategy, are examples.

Policy consultation is absent, or a “dialogue of the deaf”. Advertised policies seem poorly designed.

This is bad economics, bad for Australia’s international reputation, and probably bad politics.

Devising a package of reforms covering several key areas may improve chances of better outcomes. A package covering (i) mining taxation, (ii) credible environmental policy, and (iii) a robust Budget deficit reduction path, might overcome the current damaging policy impasse.

The first component should cover mining taxation. The Resource Super Profits Tax (RSPT) won’t apply until 2012. Can’t we have urgent, meaningful consultations between the Government and the mining industry instead of a charade? Most elements of the RSPT should be negotiable. These include application to existing mines, “grandfathering” or transition arrangements for them, the tax rate, the carry-forward rate for expenses, etc.

Non-negotiable items are (i) profits-based taxes should replace existing state royalties, and (ii) minerals tax reforms should be revenue-neutral. On these points the government and miners seemed to agree (before the present trust-destroying shambles unfolded).

The second component restores shattered environmental policy credibility. The CPRS was a mongrel, made less sensible by the Rudd/Turnbull modifications. Abandoning it was good policy. Leaving an emissions price hole filled by a hodge-podge of “direct action” cosmetics is bad policy.

Whether for climate change mitigation or resource conservation reasons, there’s a case for putting a comprehensive price on greenhouse gas emissions. A carbon tax best does the job. It should start at say, $20-$30 per tonne of emissions, increasing on a predictable path. This is the economy-wide signal that will unleash emission abatement responses as the market accepts the emissions price is “locked in”. As the emissions price increases, the need for costly, ineffective, cosmetic, “green” patch-up policies disappears. Resulting savings will support budget deficit reductions.

The new emissions abatement policy should have two core features. First, the carbon tax should have no exemptions. Second, it should apply to Australian consumption of greenhouse gas emissions, not production. This can be done by having the carbon tax operate in tandem with our GST system, using “carbon tax input credits” to flow the price signal down the supply chain, as with the GST. Exports are zero-rated (and taxed by the buyers of our exports). Imports are taxed like their locally produced competing products. Such taxes are WTO-compliant.

This second feature is crucial.

We know countries won’t cut emissions simultaneously. We’ve also learned that trying to impose a model that screws “first movers” and benefits “late movers” will fail. “First movers” need assurance early action won’t damage their competiveness, losing jobs and industry offshore to “late movers”, while not reducing global emissions at all. The evidence on this is clear. Are governments listening? A national consumption policy approach eliminates trade competitiveness as a deterrent to “first mover” action. We can lead by example, the rest of the world can follow, and no country loses competitiveness.

If we can’t get the rest of the world to follow, we might as well do nothing anyway.