Synergy, stamp duty reform to reignite economy

Opinion: Abolishing stamp duty and shaking-up energy markets to cut power prices are two policies that could form a powerful campaign platform for a state election in 2021.

There’s nothing ambitious about setting a jobs growth target lower than projections suggest will be reached organically.

But that was Premier Mark McGowan’s top commitment in February’s ‘Our priorities’ statement – 150,000 new jobs by 2024, or basically fewer than what the last state budget forecast was going to happen regardless of any new government policy.

The plan was off to a cracking start the following day, when numbers from the Australian Bureau of Statistics showed a 6.8 per cent unemployment rate in Western Australia.

Youth unemployment was astonishingly bad at 17.2 per cent, the highest level since 1996.

Today, data shows state final demand dropped about 1.1 per cent in trend terms in the year to December 2018.

Despite the contraction we, along with most of the Western world, have come to expect job creation and improved living standards happen automatically, regardless of how difficult government might make it for businesses to innovate and employ.

It doesn’t work that way.

Better living standards and new jobs don’t create themselves but rather require policies that enable enterprises to innovate and invest.

Ahead of the next state poll, both Mr McGowan and opposition leader Mike Nahan need a cut-through message, and there are two clear policies that can win votes while also supporting business growth – axe stamp duty to help homebuyers and split Synergy to lower power bills.

Two simple slogans, two policies that will resonate with voters while also sharpening the state’s economic competitiveness.

Stamp duty kneecaps new homebuyers by making it more expensive to enter the market, and reduces the value a vendor will earn from a sale.

It also makes it more expensive for sellers to move on to their next home, particularly if that new property is more expensive and attracts a higher duty.

The 2010 Henry Tax Review recommended abolition of stamp duty because it discouraged turnover of properties and was inequitable for people who need to move.

Housing Industry Association modelling of a move in that vein by the ACT, replacing stamp duty with a broader land tax, found it had supported new construction activity and renovations of existing property.

“(Stamp duty) impedes the smooth flow of the workforce to locations of high employment and restricts the opportunity for seeking education or health services,” a 2018 HIA report said.

“The inequity of stamp duty falls upon a relatively small cohort of taxpayers who need to move to find employment, training, health or for financial reasons.”

The Productivity Commission’s 2017 productivity review also recommended state governments get rid of stamp duty, on the basis that it would improve labour mobility and housing affordability.

“A recent Treasury working paper estimated that each additional dollar collected by way of stamp duties on residential property reduces the living standards of Australian households by 72 cents in the long run due to the lower investment and mobility effects,” the report said.

The only winner from stamp duty is the government, which earns about $1.5 billion a year of revenue, half of which is from residential properties.

There’s roughly $500 million of additional economic pain on top of that because the tax is tremendously inefficient, according to work by the Economic Regulation Authority and KPMG.

Abolishing it is practically the only way to improve housing affordability without hurting existing owners, and will unlock that $500 million of value for the state’s economy every year.

Obviously it will be an expensive undertaking from a budget perspective, but that can be managed if the tax is reduced over a long period, perhaps seven or eight years.

Then it could be paid for by constraining spending growth and the gradual recovery of revenue as the economy picks up, rather than through imposition of a higher land tax.

Bold perhaps, but improved housing affordability will benefit locals and will attract people to WA.

Power

Electricity prices affect voters at bill time and also are a major cost for some businesses.

That’s particularly the case in manufacturing.

Why do we talk so much about economic diversification in WA while keeping restrictive policies that stop local businesses being competitive?

The evidence on the need to break-up Synergy is overwhelming, with the state-owned utility controlling half of the generation capacity in WA and contracted to offtake a further 25 per cent.

Synergy has been happy to use this dominance.

For about 18 months, the Economic Regulation Authority has been investigating the business for using market power to distort electricity pricing.

Until recently, Synergy couldn’t even bid generation units into the market individually, instead treating them as a portfolio.

That’s a pretty handy way to hide the cost of uncompetitive older units.

Governments in recent decades have had wildly different approaches to the level of integration between state-owned utilities, but as recently as December the ERA said the lack of competitive pressure on Synergy was driving up power prices.

Similarly, a cap on generation businesses limiting them to 20 per cent market share was recommended in the Australian Competition and Consumer Commission’s report into the National Electricity Market in July.

Synergy is currently 2.5 times that level.

Breaking it apart into vertically integrated ‘gentailers’ will reduce that power.

The utility also has a legislated monopoly selling to customers who use less than 50 megawatt hours of power a year, or in common parlance, pretty much everyone.

Reform would enable smaller businesses and households to buy power from suppliers other than Synergy (an option currently only available to middle-sized and larger businesses).

The benefit is highlighted by data from the US, which shows promising results from competition in electricity markets in the eight years to 2016, according to the ‘Restructuring Recharged’ report by the Retail Energy Suppliers Association.

Residential prices in the 35 states with retail monopolies increased 18.2 per cent in the period, while in states with competitive markets, prices rose only 0.84 per cent.

For industrial users, prices fell 21.7 per cent in competitive states, and were up 8.6 per cent in monopoly states.

Closer to home, the introduction of new gas players into the market, such as Kleenheat and Origin Energy, has led to prices more than 30 per cent below the standard offer rate.

Mr Nahan has committed to introducing retail electricity competition, whereas the government has backtracked from a proposed move in this direction, ostensibly because of trade union concerns.

This is not the time for weakness.

If WA is to reach its economic potential, sooner or later a government will have to act to keep the state competitive.