In implementing its carbon tax the Gillard government is involved in a massive campaign of misinformation.
First there is the fiscal illusion. It is creating confusion about who will pay the tax in order to disguise the full cost of the policy.
Andrew Leigh -- first-term ALP backbencher and former professor of economics at the Australian National University -- recently said that the policy consisted of big polluters being taxed and money given to households, while the Coalition policy consisted of households being taxed and the money being given to polluters.
On the ABC's Insiders yesterday, Finance Minister Penny Wong said: ''This is not a tax that people pay; this is a tax that polluters pay''. That sounds all very reassuring, until we remember that Treasury thinks that household expenditure will go up by $860 per year for a $30 a tonne carbon tax.
What many people don't know is that the carbon tax will have to be much more than $30 a tonne to be effective.
As both Leigh and Wong know the argument that only the big polluters will pay is nonsense, some might say dishonest. There are two points to remember. It is household demand for goods and services that gives rise to carbon pollution. In any event big polluters will simply pass on the cost to their customers. So we know the carbon tax will be paid out of the household budget through higher prices and in some cases job losses.
The reality is that while big polluters will have to pay money to government, the burden will fall on people.
Then there is the notion that households will be compensated. Not all households, mind you; only low and middle-income households.
People should be worried that the government won't define what middle-income households are until late in the piece. Many households are going to be unpleasantly surprised.
The idea is to overcompensate low-income households. This will simply lead to them consuming more carbon intensive goods and services paid for by those higher in the income stakes.
How this would contribute to lowering total carbon emissions remains to be explained.
All sorts of anomalies and confusions are going to arise and this government hasn't shown itself capable of clear communication and explanation.
It is going to be very difficult to compensate households while also protecting trade-exposed industries. Wong knows this too. In Shitstorm, their excellent account of the Rudd government, Lenore Taylor and David Uren recount that Wong ''had reached the conclusion the business executives filing through her office were not making ambit claims but were genuinely worried about the potential impact of the plan''.
The government is hoping the introduction of the carbon tax will be similar to the introduction of the GST. When the GST was introduced there were compensating tax cuts and increased welfare payments. This compensation has been permanent. True, the GST raises more revenue than expected, but a whole raft of inefficiencies were eliminated and replaced by a more efficient revenue system.
Consumers very quickly got used to the GST and there is broad acceptance that the GST was a worthwhile and valuable reform. It is unlikely something similar will happen this time around. The GST is a tax designed to raise revenue. The carbon tax is designed to change behaviour: revenue is a secondary and, if the policy is successful, a temporary consideration.
Yet most of the discussion has revolved around how to spend the revenue.
The policy objective is to cause a substitution from low-cost but dirty energy production to higher-cost but cleaner energy production. In plain language the policy objective should lead to a permanent increase in household prices and fewer carbon emissions. But if successful, the revenue will decline, meaning there will be no money to pay compensation. There just isn't enough money to finance this scheme.
The government is planning to allocate revenue from a windfall gain to permanent spending. This is a recipe for structural deficits and fiscal irresponsibility. In the short run this policy isn't revenue neutral and in the long run it isn't budget neutral either. So rather than being reminiscent of the GST reforms, the notion of carbon tax compensation is more like Paul Keating's L-A-W reform. It is just not affordable.
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