13 Jul 2011

How to Fuck-Up an Economy Weathering the Current Economic Crisis in 1 Step

Step 1- Add Australian Prime Minister Julia Gillard

Julia Gillard
Prime Minister Julia Gillard faces a growing backlash. Picture: Kym Smith as featured on news.com.au

On Sunday 10 July 2011, Australian PM Julia Gillard introduced a Tax on Carbon on the Australian economy which basically means taxing companies that emit carbon (dioxide) at a charge of  $23/tonne. 
Now whether you believe Climate Change is real or just another cycle in the history of the Earth- The timing of introducing this Tax couldn't be worse. 

THE first two days of Julia Gillard's carbon price have gone well. But there's a long way to go as Australia's mining-boom luck is challenged by the new burden on our traditional economic strength.
While paying off the key interest groups, Sunday's package retained the core of a fixed carbon price next year followed by an emissions trading scheme in 2015. If it sticks, the price of emissions will rise every year for decades.
The package showcases Gillard's personal capacity to methodically herd opposing interests into a political bargain. And it retains the essence of Labor's 1980s reformism by relying mostly on market forces and sound governance.
Ray Hadley, the Sydney radio talkback king who exposed Labor's disastrous home insulation stimulus, was mostly complimentary to Greg Combet yesterday, telling the Climate Change Minister to get new glasses and change his hairstyle because he would be his party's next leader. Hadley's main line of attack was that Gillard had broken her no-carbon-tax promise.
 Gillard's political need to protect the steel industry from higher electricity costs is driven by the two-speed economy pressures from our China boom. That is, large parts of the economy will be pounded by the mining boom's strong dollar and the higher electricity costs from the carbon price.
Soaring iron ore, coal and gas prices have jacked up Australia's terms of trade to their highest level for at least 140 years.
This has produced a higher peak of Australian prosperity than projected by Treasury modelling of Kevin Rudd's ETS in 2008. From now, however, export prices are likely to trend down, removing our source of easy prosperity and exposing the slump in productivity growth.
That threatens to make the modelled costs of Gillard's carbon price -- a 0.1 per cent reduction in annual gross national income growth -- look less piddling.
Wayne Swan made much of the Treasury modelling showing that the carbon price would have virtually no drag on jobs growth. But, when fully presented, the new Treasury modelling coyly reveals why: real wages are projected to be about 1 per cent lower than otherwise by 2020.
Cost-of-living politics are being inflamed by higher power bills.
Real or after-inflation household electricity prices have risen by more than 40 per cent in the past five years, even without a carbon price.
Treasury suggests the carbon price will push up power bills by another 10 per cent in 2012-13, but voters will find it hard to distinguish between this and further increases in electricity prices due to other factors, such as the massive investment in transmission and distribution infrastructure. By the 2013 election, this household income squeeze could provide Abbott with ammunition to fire at Gillard's compensation promises along with her no-carbon-tax vow.
At the same time, the two-speed economy pressures will continue to squeeze sectors such as steel and motor vehicles.
The risk is that the steel compensation will become a precedent for further handouts rather than a one-off political necessity to be ring-fenced by the Productivity Commission.
And any hiccup in our China luck could expose the budget weakening produced by $4 billion of extra carbon package spending over four years that Swan suggests does not have to be offset to meet Labor's fiscal rules.
The Treasurer is clinging to his promised 2012-13 surplus by shuffling this spending so that it actually improves his bottom line that year.
The problem is that Australia now has to digest two massive price shocks and the threat of global economic instability. It will be a triumph -- even a miracle -- if Gillard's carbon price survives the pressure.

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