Rising power prices are a symptom of policy malaise

Australians who have blithely supported ratcheting up our renewable energy target might be in for a rude shock this month. Households across the country are opening their power bills to see electricity prices rose 20 per cent between June and July. The essentials of home life and ordinary commerce are becoming more and more costly, with profound consequences for our standard of living. The consequences of years of feel-good energy policy are coming home to roost.

The latest analysis by the Australian Electricity Market Operator, released this week, suggests this summer blackouts worse than what occurred in South Australia can’t be ruled out unless the nation’s power supply is urgently consolidated. It’s a sad reflection of the naivety of policymaking in Australia that a country with such rich deposits of coal, gas and uranium is facing blackouts.

Australia’s self-destructive energy policy is an unedifying microcosm of the quality of public policy more generally. Debates about how to improve competition and productivity, which would boost Australians’ living standards, have fallen by the wayside. Who even remembers the Harper review into competition policy commissioned by the Abbott government? The sensible recommendations of the Henry tax review are a distant memory. Instead, the interminable debate over same-sex marriage and the eligibility of members of parliament continues. Perhaps 1999, when we mulled over becoming a republic, was the last time the national discussion was so dominated by emotional issues far removed from the concerns of ordinary Australians.

The latest national accounts, released this week, show Australia’s economy grew 0.8 per cent in the June quarter, leaving the economy 1.9 per cent larger than a year earlier. A decade ago, when Australia’s growth rate hovered above 3 per cent, this would have been embarrassing. These days, they are a “statement of confidence” according to Treasurer Scott Morrison. In reality, the accounts paper over serious economic problems. Growth has been propped up by surging iron ore, gas and coal exports, over which we have no control, and strong growth in household consumption, which was, once again, bolstered by falling rates of saving and the potentially false confidence instilled by rising house prices. The household saving rate fell yet again in the three months to June to 4.6 per cent, the lowest level since late 2008. Business investment, which rose for the third quarter in a row, was one the bright spot. Another is job growth, which has kept the unemployment rate below 5 per cent.

But how reassuring is an anaemic increase in business investment after years of ultra-low interest rates? Reserve Bank governor Philip Lowe, in a speech earlier this week, reiterated the RBA’s confidence that wage and economic growth would gradually whirr back to 3 per cent within a few years. This is hardly reassuring: by its own admission it has been repeatedly wrong on wages. The national accounts showed wages per hour in fact fell 0.3 per cent in the 2017 financial year.

As former treasurer Peter Costello recently noted in an interview with The Australian, the central bank was spectacularly wrong about the economy before the global financial crisis in 2008, lifting interest rates to fight inflation just as the world was entering a profound period of deflation. Its policy of slashing interest rates to boost real business activity has failed, leading instead to a massive debt-fuelled housing boom from which it will be difficult to extricate ourselves if world interest rates increase. Public agencies, by their nature, have a bias to optimism; after all, why would we respect them if they forecast doom and gloom?

Policy is substandard at the state level too, as the West Australian budget reminded us this week. Lifting payroll tax on 1300 businesses is hardly the best way to smooth the state’s transition away from resources. At least new Treasurer Ben Wyatt spared the banks from a jobs-destroying South Australia-style levy, whose constitutionality remains in question.

Getting energy policy right should be a priority for both major parties. Power prices crucially affect our cost of living and international competitiveness. Labor should be particularly condemned for blaming privatisation of electricity networks and generators for rising electricity prices. Indeed, years of goldplating by state-owned electricity grids have pushed up prices, a phenomenon made worse by the more recent overlapping patchwork of highly inefficient renewable energy targets at state and federal level. For now, Australia’s luck continues: the dollar briefly rose above US81c on Friday, far higher than pundits would have imagined a year ago. But a sharp drop in commodity prices or a jump in global interest rates would reveal the vulnerability of Australia’s economy.