The Albanese Government had better look up the history of the Labor Scullin Government of 1929:
James Henry Scullin (18 September 1876 – 28 January 1953) was an Australian Labor Party politician and the ninth Prime Minister of Australia. Scullin led Labor to government at the 1929 election. He was the first Catholic, as well as Irish-Australian, to serve as Prime Minister of Australia. The Wall Street Crash of 1929 transpired just two days after his swearing in, which would herald the beginning of the Great Depression in Australia. Scullin’s administration would soon be overwhelmed by the economic crisis, with interpersonal and policy disagreements causing a three-way split of his party that would bring down the government in late 1931. Despite his chaotic term of office, Scullin remained a leading figure in the Labor movement throughout his lifetime, and served as an éminence grise in various capacities for the party until his retirement in 1949.
…After Scullin had won a landslide election in 1929, events took a dramatic change with the crisis on Wall Street and the rapid onset of the Great Depression around the world, which hit heavily indebted Australia hard. Scullin and his Treasurer Ted Theodore responded by developing several plans during 1930 and 1931 to repay foreign debt, provide relief to farmers and create economic stimulus to curb unemployment based on deficit spending and expansionary monetary policy. Although the Keynesian Revolution would see these ideas adopted by most Western nations by the end of the decade, in 1931 such ideas were considered radical and the plans were bitterly opposed by many who feared hyperinflation and economic ruin. The still opposition-dominated Senate, and the conservative-dominated boards of the Commonwealth Bank and Loan Council, repeatedly blocked the plans.
With the prospect of bankruptcy facing the government, Scullin backed down and instead advanced the Premiers’ Plan, a far more conservative measure that met the crisis with severe cutbacks in government spending. Pensioners and other core Labor constituencies were severely affected by the cuts, leading to a widespread revolt and multiple defections in parliament. After several months of infighting the government collapsed, and was resoundingly defeated by the newly formed United Australia Party at the subsequent 1931 election.
The analogy today is between Scullin’s progressive macro policy and Albo’s progressive energy policy.
Scullin aimed to use a series of excellent proto-Keynesian policies ahead of their time but failed to implement them as he was run down by an economic crisis.
Albo has a series of excellent progressive energy policies ahead of their time (or, at least, on time) but he is about to be overwhelmed by an economic crisis that will make them impossible to implement.
And make no mistake, he will be blamed for it and entrench the Labor moniker of “poor economic manager” for another generation.
The crisis I am referring to is the most ridiculous case of self-inflicted economic harm I have ever seen. More unnecessary than tits on a bull. And entirely resolvable with the stroke of a pen.
It is the unabashed war-profiteering by a gas export cartel and coal producers on the east coast.
Since the Ukraine war began, Australian coal prices have risen by around 300%. Australian gas prices have risen by around 700%.
This war windfall is now threatening to plunge the entire economy into recession via massive demand destruction and runaway interest rate hikes. To wit:
The cost of living pressures come as NSW household customers of power retailer Electricity in a Box have been told of a 95 per cent increase in their bills. Gas prices have surged four-fold for two textile manufacturers in Melbourne as the global energy crunch finally slams home.
The extraordinary price increases provide evidence that the regulated rise in electricity tariffs of up to 18 per cent announced this week is only a pale shadow of the dark energy price crisis starting to grip Australia, which has been described by one energy user as “frightening”.
They have dashed hopes that homes and businesses will escape the crisis that has plagued European markets, pushed homes into energy poverty and closed energy-intensive manufacturing plants.
The crunch also increases the complexity of the emissions reductions task for Australia’s new Labor government, already under pressure on climate commitments and which had promised before the election – as had the Coalition – lower energy prices under its watch.
…The wholesale electricity price went from $48.90 a megawatt-hour in September to $77.17/MWh by January, then to just more than $100/MWh by March, according to Schneider Electric. But this month, they are running at more than $300/MWh, and forward prices have also surged.
Spot gas prices on the east coast have gone from less than $10 a gigajoule at the start of the year to average about $16/GJ in April, but were at $50/GJ in Sydney on Friday.
The consequences of this twin energy war-profiteering are five political economy shocks that will crash the economy and the Albanese Government.
Demand destruction for business
As things stand, gas bills will rise 500-1000% over the next few years. This is going to wipe out what remains of Australian manufacturing.
The Albanese Government has a mandate to repair manufacturing owing to the fragility exposed by China and the pandemic in the past few years. We will see the opposite as the post-2014 trend shutdown of industrial gas users dramatically accelerates:
Even worse, gas-fired power stations often set the marginal cost of electricity, especially in VIC and SA.
Add that coal plays a large role in NSW and QLD for wholesale electricity prices and what we get is a scenario in which every business on the east coast is going to see energy bill increases from 100-200% in the next two years. Swathes are going to shut, sack workers, and wind back investment.
Demand destruction for households
Utility bills make up only 3% of the CPI but if they double or triple then that is a corresponding income shock to every household east of WA. In effect, this is a 4-6% real wage cut over the next two years.
This will come straight out of discretionary spending budgets and hammer the entire consumption sector which is 55% of GDP. Roughly speaking it is a hit of $20-33bn a year in spending and double that in year two.
It will smash growth.
CPI crisis, rate hikes and house price crashes
3% of the CPI does not sound like a lot. But if that price doubles or triples then it is gigantic. The RBA will have…wait for it…an additional 4-6% of inflation over the next two years to deal with.
But that’s not even the worst of it. Every business east of WA will have to pass on the new cost. So, the 60% of the economy that is non-tradable will add another 1.5-1.8% to the CPI each year. Tradable may add it too. A total of 7.5-9.8% extra inflation over two years.
This will deliver the runaway interest rates that futures markets have been forecasting as the RBA is forced to tighten enough to “make room” for an economically empty war-profiteering price shock.
A house price crash will follow which will, in turn, crater the banking system. And drive the AUD to the moon in the middle of a recession triggering even more hollowing out.
Obviously enough, such a destroyed economy will entrench Labor as the greatest economic mismanager of all time.
Budget demolition and inequitable distribution
The federal budget will be hammered on multiple fronts.
First, the recession will gut income and radically lift outgoings.
Second, interest rate payments of the huge natiaon debt wil balloon.
Third, the poorer you are, the higher the proportion that utility bills make up of your outgoings. So much greater compensation will be paid to low-income households.
Fourth, there will be some benefit from coal profits but the gas cartel pays NO TAX. So, unbelievably, there is no upside from its increased export earnings.
Energy transition wreckage
Throughout the gas cartel gouge since 2014, the Coalition mischievously blamed rising power costs on the rollout of renewables. In truth, it was the rise in the renewable capacity that was holding down the gas-fired power price rises.
With the Albanese Government having adopted aggressive decarbonisation targets, the twin war-profiteering energy shock is a political double-whammy brewing that will be a gift to these same LNP fossil fuel interests.
Renewables will require sustained gas peakers for dispatchable power for many years yet. Indeed, as the coal fleet shuts, the grid may become more reliant on gas-fired power as batteries and other firming power are built out.
And coal is still the dominant baseload power source in NSW and QLD so, there, the price rises will be relentless as well.
The LNP is obviously going to blame any and all power price rises on renewables and, as we’ve seen time again in energy politics, the details are too complex for punters to grasp for the centre to hold (not even the MSM has a clue or is corrupt).
This has within it the seeds of a spectacular LNP revival and one-term Albanese catastrophe for Labor.
What should the Albanese Government do?
The Ukraine war is not ending any time soon and, more importantly, the Russian sanctions regime that inhibiting the flow of gas and coal to Europe is all but permanent. The European ban on Russian coal does not even start until August.
Gas and coal prices will come down eventually as the supply of global supply adjusts and renewable investment skyrockets, but not swiftly enough to prevent the above economic disaster for Australia. For the time being, the European war is the marginal price setter for both gas and coal prices globally.
In these circumstances, the Albanese Government should apply a 100% export tax to all coal and gas exporters on the east coast, benchmarked to pre-Ukraine war prices. The producers should not be allowed to war-profiteer. This is a classic windfall and belongs to the owners of the assets, the Australian people.
This would instantly return local prices to pre-war levels and deliver an immense budget windfall to Australia that could be saved or distributed as the economic cycle and politics demand.
In effect, this is similar to the policy now underway in the UK. Albo unwisely ruled it out on Friday.
What the Albanese Government is capable of doing
We all know why Albo was so quick to rule out a war-profiteering is “super-profits” tax. Labor is deeply scarred by its mishandling of the Rudd super profits tax episode which ultimately cost it government via relentless infighting.
There is also the issue of press capability and bias. The former has declined materially over the past decade as the latter increases. LNP stooges now occupy Murdoch, former Fairfax turned Nine, and the ABC. Any attempt at national interest policy over private sector gouging will send them into an anti-tax frenzy.
But the Albanese Government MUST do something very serious, and it will almost certainly send the Minerals and Gas lobbies into meltdown so the politics of it matter.
The answer for gas
NSW has begun subsidising utility bills for consumers. More will surely follow everywhere. Without any new and fiscally sterilising tax take tax, this is a terrible idea. Such bill subsidies are essentially recycling the wider tax base as a war-profiteering subsidy for the gas cartel.
It will be a huge budget drain, can’t possibly be large enough to backfill the growth shock, and will only make the inflation consequences worse.
Thankfully, Australia is not trapped by such terrible policy choices. As the above chart shows, the east coast economy has a staggering amount of gas production. The problem is that three-quarters of it is being exported to China.
The answer for the east coast is so blindingly obvious that the longer Labor leaves it the more idiotic it is going to look. We need to keep 5-10% of those export volumes at home to force the gas price back to $7Gj.
Holding back gas volumes for Australia’s east coast economy does not even require policy innovation nor is it a political risk. It is already bipartisan. The Coalition created the Australian Domestic Gas Security Mechanism (ADGSM) in 2017. At the time it was written, gas prices collapsed from $20Gj to $10Gj. And that was achieved only by PM Turnbull threatening to trigger the Heads of Agreement.
All the PM needs to do is trigger the ADGSM and call in the gas cartel executives for a polite chat in which he makes clear that the local gas price will either fall below $10Gj in the near future or he will trigger the ADGSM, as well as toughen it with explicit price targets as necessary.
If the cartel resists then Albo can recount the history of the LNG boom and the broken promises of the cartel which assured Australian authorities that there would be plenty of gas for Australia despite the new exports.
It may result in a few LNG cargoes declaring force majeur and piss off China. But who cares if their prices rise a bit, meaning that it costs the gas cartel nothing to hold back volumes anyway.
In selling this to the Australian public, all Albo needs to do is to point to WA where gas reservation has held the price at $5.5GJ, 1000% lower.
The cartel will fold like the very expensive suits that they are.
The answer for coal
The answer for coal is more complex but can be couched in the same way. Given export taxes are likely beyond Albo, he should create a domestic reservation facility for coal that is analogous to and works in tandem with the ADGSM.
The coal industry is more fragmented, with more mines, many different arrangements in contracts, captured output etc, so it will need a different mechanism.
I suggest a Domestic Coal Security Mechanism which applies a 100% levy on all domestic sales above $100 per tonne. To drive compliance, $20 per tonne of this levy is returned to those mines that meet the sales price criteria.
The tandem reservation policies can be bundled together as a single Domestic Energy Security body governed directly by PM&C.
There are plenty of ways of doing this. The point is it must be done.
Either Albo’s dream economic team of Andrew Leigh, Andrew Charlton and Jim Chalmers act to cut domestic energy prices off at the knees or the Albanese Government will be stillborn into a crisis so large that it will stamp Labor as economically inept for living memory.
To put it bluntly, does Albo want to be Bob Hawke or Jim Scullin?