Why the carbon tax will lead to Government spending cuts: Kohler

At the same time as the Clean Energy Future bills were passing through the Senate yesterday, a nice young man from South Africa was at our house changing all the light bulbs to energy-saving ones.

He had simply knocked on the door with an official-looking tag hanging from his belt and offered to do it – for nothing. It’s a Victorian state government scheme and when he had finished we had to speak to his boss to confirm it was done, and he had to take all of our old light globes to collect his bounty.

This is not good news for the federal government. State government money, and not just in Victoria, is being used to reduce carbon emissions through a variety of expensive schemes, but the federal budget depends on selling lots of carbon permits to make its budget forecasts.

In fact, to protect its revenue the federal government might have to clamp down on all those well-meaning state emissions reduction schemes.

Treasury forecasts put the revenue in 2012-13 from the sale of permits under the scheme passed yesterday at $7.74 billion. Another $860 million is to be raised from reductions in fuel tax credits.

But as usually happens with budgets, outgoings are fixed while incomings are variable.

The expenditure that is now locked in for 2012-13 totals $7.5 billion in nine different compensation programs, the largest of which are the household assistance package ($4.2 billion) and the “jobs and competitiveness program” ($2.85 billion).

Any slippage in the revenue means that Wayne Swan’s aspiration/promise to return the budget to surplus in 2012-13 is in more trouble than it already is – which is a lot.

Even using Treasury’s numbers for the CEF bills, Deloitte Access Economics now says the budget is heading for a $1.9 billion deficit in 2012-13 instead of a $3.2 billion surplus, as predicted in the May budget this year.

And with state government busybodies going around replacing light globes with energy efficient ones, that could blow out even more. Why, given the way lights are left on in my place, yesterday’s work by that young South African could add a billion or two to the deficit alone.

During the first three years of the CEF scheme, when the price is fixed at $23 rising 5 per cent a year, Treasury expects to raise $24.5 billion from selling carbon emission permits. Another description for that, of course, is the carbon tax.

After that time, the revenue depends on the market price of permits, within a legislated ceiling and floor price. The ceiling is $49 per tonne and the floor price is $15, rising annually by 4% in real terms.

The European price of permits has collapsed because of the impending recession and is unlikely to recover much over the next three years, so there is a fair chance the floor will apply.

That means the revenue from selling permits could drop by 40% in the 2015-16 budget (although, of course, three years is an eternity in politics, especially with the party that’s promising to repeal the legislation so far ahead in the polls).

As it is, Australia is already headed for a series of austerity budgets, and as with Europe the idea is good but the timing is bad.

And even without any unpredicted reductions in either volume or price of carbon permits, the situation was worsened by yesterday’s passage of the CEF bills, not improved, because the compensation is greater than the revenue in the early years.

We are already undergoing close to the largest fiscal contraction in the OECD – 3.5 per cent over three years – and due to the revenue slippage this is likely to become 4 per cent: a small but material tightening.

Both sides of politics are now combing through the budget, line by line, looking for savings.

The Coalition must find more than the Labor Party because it has a much larger hole, in turn resulting from its commitment to cancel two big taxes.

The Labor government has merely been caught by Treasury’s over-optimistic forecasts, as it has turned out, for company tax. The Coalition is on the hook for much more than that because it wants to chop the Mining Resources Rent Tax as well as the carbon tax.

So get ready for big cuts in government spending.

This article first appeared on Business Spectator.