Tony Abbott has hung his credibility and that of his incoming government upon the repeal of the carbon tax. From The Australian:
“It is critical if trust in our polity is to be restored, that that doesn’t happen in the future,” he said. “So we will do what we say we do, we will do no more, we will do no less.
…”I’m constantly being challenged to explain how I’m going to repeal the carbon tax. Let’s challenge the Labor Party: are they going to defy a government that has a clear mandate to repeal it? Are they going to tell the people, essentially: ‘Up yours? We don’t agree with your position on the carbon tax’.
…Mr Abbott said the carbon tax abolition legislation would be put to parliament within weeks of a Coalition election win and it would be put back into the Senate as quickly as possible again if it was defeated.
Mr Abbott said if the Senate was obstructive on matters for which the Coalition believes it had won a mandate there would be a double-dissolution election.
There is no backing away from this now. And why not? If the Labor Party does get wiped out at the election then they will be utterly demoralised and Abbott will simply roll them out of the Senate as well. This is a plan for an unstoppable political juggernaut.
Abbott also partly resolved one of the more pressing economic questions about how he will deal with the carbon price compensation, which comes in the form of large tax cuts as well as family payments and pension boosts:
“We are absolutely confident that people will be better off under us and we give a commitment that people will be better off under us.”
…Mr Abbott said it did not automatically follow that the tax-free threshold would return to $6000 from $18,000 if the Coalition won office and scrapped the carbon tax.
…“Now if you don’t have the carbon tax you don’t need the compensation, but we will continue to fund tax cuts and pension increases.”
These are fairly mealy-mouthed words. I see neither a promise nor a commitment and it’s no wonder. Abbott is going to lose $18 billion in carbon tax revenue over his first three years in office alone. That’s in addition to $10.5 billion he’s going to lose under the scrapped MRRT.
If he’s going to retain the $11 billion in tax cuts then he’s got a $17 billion black hole to fill. Some of the revenue will be recouped on the slightly higher corporate profits and maybe slighter higher spending by consumers (assuming they actually get a discount to their electricity price, which is doubtful given Abbott will impose higher cost regulation upon the sector) but not enough to fill the hole. He’ll still be losing something in the order of 1.5% of his government’s tax base.
Either he runs bigger deficits, which would be wise given the ongoing China adjustment will still be hitting the economy, or he delivers spending cuts (or higher taxes elsewhere which is unlikely!) Politically he can’t run a looser fiscal policy than Labor, which will already be handing over a deficit of roughly $10 billion. So, giving Abbott the benefit of the doubt, the cuts will have to be in the order of 0.3% of GDP per annum over the forward estimates on top of whatever he tightens over and above Labor’s current plans.
This austerity will add to falling mining investment as well as a renewed push down on the terms of trade (via falling iron ore prices). Either interest rates and the dollar will fall much further and get more activity going to fill the hole or recession 2014 just firmed a touch.
