Policy choices must reflect the challenge of inflation

The highest inflation in two decades should sharpen the focus of voters who must decide who they want to navigate the uncertain economic times ahead. It may be true that many of the current drivers of inflation are outside of the control of government and include rising energy prices globally and disruptions to supply lines because of Covid. But the wrong government policy can make things worse.

A comparison exists between the US, where inflation is running at 8.5 per cent and beyond under a profligate Democratic government, and 5.1 per cent in Australia under a Coalition government. Josh Frydenberg reinforced the message on Wednesday when he said: “These international inflationary pressures are being felt around the world, but they underline why it’s so important to have strong economic management.”

This is the contest that demands to be at the forefront of the election campaign, rather than confected disputes over whether trans athletes should be allowed to compete in women’s sport. The latest inflation figure points to a rise in interest rates, possibly before the election. The Reserve Bank’s inflation target is 2 to 3 per cent over the medium term. The central bank would risk inflationary pressures getting out of hand if it did not move quickly. Building costs, tertiary education fees and petrol were the main contributors to the higher consumer price index, which will underline voters’ concerns about living costs. But with many home and small business loans locked in for now, it will be what happens during the next 12 or 24 months that matters most.

There is a delicate balance between lifting wages and boosting productivity to avoid a wages price spiral that will only add to inflation. Additional costs from profligate election promises would make things worse. Despite the small-target strategy that presents a future Albanese government as a continuation of business as usual, there are significant policy differences between the major parties that must be properly explained. Labor added to the list on Wednesday with plans for a white paper on lifting wages. Unions have fired a warning shot of a push for higher wages, claiming the latest inflation figures mean the average worker will receive a real pay cut of nearly $2000 in the first half of this year. Confusion within Labor over its cap-and-trade emissions trading scheme is an example of how voters are not being properly informed. The mixed messages on how the system will work and what industries will be covered suggests the policy has not been properly considered or the party does not want to let voters know what is in store.

Labor no doubt fears a repeat of the 2019 campaign in which it could not explain the cost of its climate policies. Unfortunately for voters, the Coalition finds itself unable to trumpet the issue this time because it is trapped between its instincts for less market intervention and support for rural and mining communities and the attack it faces in important Liberal seats that have been targeted by the Simon Holmes a Court-sponsored teal independents. But voters deserve to know how Labor’s climate policy will differ from the Coalition’s and what costs it will impose on ordinary households and disproportionately on those who can least afford it. ALP policy is to expand and strengthen the safeguards mechanism that exists in policy introduced by Greg Hunt as part of the Abbott government. This means big companies covered by the scheme will have much greater obligations to cut their emissions or buy permits to cover them. The squeeze on emissions will tighten each year to meet the ALP’s target of 43 per cent by 2030 and net zero by 2050.

Claims that the revised safeguards mechanism is not a carbon-trading scheme are disingenuous. Big companies will be given permission to emit an amount of greenhouse gas each year determined by the best practice for the industry in which they operate. In theory, trade-exposed industries will be given special consideration to avoid the situation where high-emissions activities simply relocate to other countries with less onerous controls. Last November, Labor climate spokesman Chris Bowen ruled out introducing a carbon price or an emissions trading scheme if his party won government. Anthony Albanese made the same promise on radio on Tuesday. But Labor’s policy is clear that it will cap emissions for Australia’s biggest companies and allow a trading system for carbon permits. Mr Bowen also has confirmed the policy could include coalmines and other trade-exposed activities. But exactly how they will be treated will not be known until after the election and will be decided by the Clean Energy Regulator.

Labor has sought to deflect questions about its scheme by claiming correctly that it is based on policy already in place and introduced by the Coalition. It also has the support of the Business Council of Australia, whose members have their own plans to cut emissions and no doubt will pass any additional costs through to consumers. For them, making the scheme mandatory will limit competition from companies that do not wish to play along. As it stands, the safeguards mechanism captures facilities that emit more than 100,000 tonnes of carbon a year, including 60 coalmines.

The Coalition favours encouraging technological development rather than penalties to meet its lower emissions target of 26 to 28 per cent below 2005 levels by 2030 and net zero by 2050. The real challenge will come in the event of a hung parliament, with the Greens and teal independents demanding much tougher action than the Coalition or Labor. All sides must be honest about their plans and how much they will cost. The evidence is that voters want action on climate change but are reluctant to pay for it. It is vital that the cost of policies to cut emissions and transition away from fossil fuels is made known. Higher costs that result from taking action on climate change could well compound the impact of rising inflation. As always, it will be the less well off who are most vulnerable.