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There's a way out of Turnbull's economic problems - not embracing Bernardi

Peter Martin

So keen has Malcolm Turnbull become to appease his party's right wing that he is actually governing badly.

It's not what he promised. And at the start, it's not what he delivered. His early decisions were based on evidence. He examined the payoff from increasing the goods and services tax, then dropped the idea (to the consternation of some in his party) because the payoff wasn't there. He examined the tax treatment of superannuation, found it was an outrage, and (again to the consternation of many of his supporters) toughened it. Not these days.

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The issue that set Cory Bernardi off was what appeared to be his brief embrace of an emissions intensity scheme. Late last, year the man Turnbull appointed as Chief Scientist identified an intensity scheme as the lowest-cost way for Australia to meet its emissions reduction targets. Dr Alan Finkel reported that the Climate Change Authority (whose chair and the majority of its board the Turnbull government appointed) and the Australian Energy Market Commission and the Australian Energy Market Operator had all found that, of the available options, allowing electricity producers to trade in intensity would do the least economic damage and cause the least disruption.

What they proposed is completely unlike Labor's emissions trading scheme and was always provided for in the so called direct action legislation introduced by the Coalition's Greg Hunt under Prime Minister Abbott.

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It would measure emissions of the electricity industry and divide them by total production to calculate the average emissions intensity. Producers with greater than the average would have to buy credits from producers with less. The transfer of funds would make coal-fired power more expensive and combined-cycle gas and wind power less expensive, but unlike Julia Gillard's carbon tax, it wouldn't much change the average price.

Over time the government could reduce the intensity ceiling, advantaging solar, wind and gas power further, but in a more gradual and more market-sensitive way than renewable energy targets or mandated closures.

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Bernardi exploded on his return from a taxpayer-funded trip to the United Nations, and Turnbull ruled it out. "We will not be imposing a carbon tax and we will not be imposing an emissions trading scheme, however it is called," he declared. "An emissions intensity scheme is an emissions trading scheme, that's just another name for it," he explained, in an appalling departure from his usual attention to detail. Then in his first Press Club address for the year, in an apparent attempt to differentiate himself from Labor, he countenanced the installation of new coal-fired power plants. Later he suggested using government funds to pay for them.

The only problem is that coal-fired power stations don't mesh well with a system which is increasingly reliant on intermittent power from sources such as wind and solar. What's increasingly needed is something to come on at night, and when the wind's not blowing. Gas stations are brilliant at it. They emit far less than coal and can be turned on and off quickly. Coal-fired stations, like nuclear power stations, are good at providing constant baseload power, something we are going need less of.

Turnbull's flirtation with new coal-fired power stations needn't hurt us much. The Australian Energy Council says even the best are "uninvestable". No-one's going to build them. But his embrace of very expensive, very big company tax cuts might do a lot of harm – not because company tax cuts are a bad thing in themselves (on balance after many years they appear to boost economic growth, although their effect on national income is uncertain) but because they are so incredibly expensive.

The modelling conducted for the Treasury finds that cutting the company tax rate from 30 to 25 per cent as the Coalition plans would cost $11.3 billion per year. The government would get back a chunk of it ($3.1 billion) in higher income tax collections from shareholders whose imputation benefits would be cut, meaning Australian tax-paying companies would get no benefit, leaving it $8.2 billion per year out of pocket. For that money, or for a lot less, Turnbull could boost the economy right now when it's needed.

Stephen Anthony, a multiple BusinessDay Forecaster of the Year, says this year we are a "one-trick pony". Mining investment is continuing to slide, other businesses are far too cautious to fill the gap and the only big driver is home building. When it comes off, there'll be little happening. The obvious way out is for the government to borrow itself (using extraordinarily low rates), allocate the money to worthwhile projects pre-identified by Infrastructure Australia, and then farm out the building work to the private sector. The projects that are moneymaking can be sold off later to passive investors who are desperate for low-risk returns.

It's the kind of deal making Turnbull would have once relished. It would steal ground from Labor and from the conservatives in his own party by actually addressing the problems we've got. It would be governing rather than talking, and it might just keep us afloat.

Peter Martin is economics editor of The Age. 

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