‘Backflipping’ to credible policies is good politics

This model allows the government and the Opposition credibly to pursue their promised 5 per cent emissions reduction target, regardless of Copenhagen, rather than, as now, just “talking the talk”.

The third component in the package is a credible, robust, Budget deficit reduction path. Overseas, there’s a financial and public debt storm brewing. We’d better be in good shape to weather it.

The RSPT is dodgy Budget financing. Its proceeds are being spent several times (for example, to “encourage” West Australia and Queensland to support this tax, in addition to recent promises to spend it in other ways). Crucially, the revenue expected from it assumes no adverse industry reactions, despite concerns it will reduce new mining investment, activity and tax revenue.

More robust deficit reduction measures exist. A consumption-based carbon tax will raise a lot of revenue as it raises the price of emissions. Only a small part of this should be a net revenue gain to the Commonwealth Budget. Most should be used to finance income (and other) tax cuts and increased social welfare benefits.

The carbon tax is not designed to cut real incomes, especially for lower income groups. It is intended to raise the price of emissions-intensive products relative to “greener” products. That signal changes consumer behaviour and production technology across the economy. But some of the revenue raised could be used to help reduce the Budget deficit.

Two other measures would help restore policy credibility on climate change and Budget deficit reduction. First, reinstate excise indexation for petroleum products. This stops their real prices falling under what is effectively an increasing emissions subsidy. In two to three years, excise indexation cumulates to a $1,000 million annual improvement in the Budget bottom line, rising by an extra $300 million or so each year after that.

Second, abandon or quickly phase out the current FBT concessions for motor vehicle use. These subsidise more emissions. This would raise another $1,000 million (plus) a year towards Budget deficit reduction.

A deal on this policy package requires restored trust and “good faith” negotiations.

Some assert the Government can’t reverse its position on the RSPT, (or other positions). They say more “backflips” would destroy its credibility. This is nonsense. The best people make mistakes, and learn from them. Some younger people have to learn that adjusting positions in the light of evidence shows strength, not weakness. Most older people “get it” from experience.

The Government should assess the evidence, and, as necessary, change its mind. That’s what smart people would do. Ask John Maynard Keynes.