13/08/2013 - 15:44

Downturn not the time to increase debt

13/08/2013 - 15:44


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Who pays? That is a question no-one seems to be asking in the debate over solar-power subsidies, or the bigger question of who pays for the state government’s debt binge.

Who pays? That is a question no-one seems to be asking in the debate over solar-power subsidies, or the bigger question of who pays for the state government’s debt binge.

The answer to the solar question is easy – the people who pay are those without solar power.

Environmentally admirable as it might be to generate your own electricity using heat from the sun, there are cost and fairness questions that are drowned out by the green-power argument.

The simplest way to test that point is to ask how many poor people have solar panels on their houses.

The answer is not many because they can’t afford the capital cost, which means they pay the full price for electricity while subsidies flow to the owners of solar panels; it’s an interesting example of how middle-class welfare works, with the poor subsidising the rich.

As an example of an unintended consequence, the debate over solar subsidies is about as good as it gets.

The solar panel lobby and the environmental movement will dodge the subsidy issue, yet the subsidies saga provides a good example of how tricky it can be for a government to unwind its mistakes.

The first error in the case of solar subsidies was offering excessively generous feed-in tariffs, which were designed to encourage the production of environmentally friendly electricity.

For better or for worse, the high price offered for home-grown electricity led to a financially focused stampede because households saw a way to make fat future profits while also feeling green.

The second government error was in trying to slam the door shut on the power subsidy scheme, potentially breaking contracts that households had signed in good faith.

The third mistake was the subsidy backflip, which means Western Australian households without solar panels and a generous feed-in contract will be subsidising the fortunate few for the next 10 years.

Getting it wrong with the original overly generous power purchase agreements has led to a small budget mess for the WA government.


Taking the wrong road

A much bigger mess is in the making with the plan to dramatically expand government debt to fund rail and other infrastructure projects.

The argument in favour of a major expansion in public works during a slowdown in the wider WA economy appeals to politicians today but will be much less appealing to future taxpayers as they are forced to service a debt mountain.

Solar subsidies and debt-powered railways are examples of what is meant by the old saying about the road to ruin being paved with good intentions.

An alternative approach to tackling budget problems can be found in the way big mining companies are dealing with the downturn in commodity prices, starting with Rio Tinto, which released its half-year profit result on the same day the state government brought down its budget.

While not altogether fair to compare a company with a government, Rio Tinto is a business with deep roots in WA through its iron ore, salt and diamond operations.

Just as the government was boosting its budget by lifting spending and running up debt, Rio Tinto was slashing spending, retrenching workers and paying down debt.

Next week, a second corporate example of how to manage in difficult times will be on display when BHP Billiton releases its full-year profit result and provides a fresh look at its cost-cutting efforts.

WA, with its heavy reliance on the mining and oil industries, shares many of the features of Rio Tinto and BHP Billiton and is subjected to the same pressure of falling commodity prices.

The companies, driven by shareholder demands, are cutting costs and preparing for the possibility of a prolonged slowdown.

The government, trying to please voters, is doing the opposite by expanding into a downturn.

It will be interesting, especially for WA taxpayers, to see who’s got it right – the companies or the government.


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