Carbon tax Groundhog Day

The 'calamitous' carbon tax is a gnat on the hide of the elephant in the room. It is drawing oxygen away from any sensible debate on the great changes affecting our economy.

While the political storm over the circumstances of Julia Gillard's resignation from Slater & Gordon in the mid-1990s is filling the nation's front pages, substantial policy debate is once again pushed into the background.

I'm sorry, did I say 'substantial policy debate'? If only there was one.

Since the resumption of parliament after the winter recess, question time in the House of Representatives has shifted from one variety of farce to another.

Previously, the prime minister would be asked a number of different ways why she had lied to the Australian people by saying "there will be no carbon tax under a government I lead", before the Opposition Leader moved that "standing and sessional orders be suspended" so the PM could explain why she lied.

Cue the banging of heads on desks by most of the parliamentary press gallery – groundhog day really does test one's sanity.

Now, a subtle variation has emerged. Question time is a queue of Coalition MPs arriving at the despatch box to read out the names of companies in their electorates, followed by a number representing each company's whopping carbon tax bill.

When that conga line has reached its end, Tony Abbott can once again move that standing orders be suspended. But rather than MPs wasting the rest of question time voting on this fruitless motion (the government wins the vote every time), the government now cuts Abbott off by moving "that the member no longer be heard", and the House divides to vote on this exercise in futility instead.

So groundhog day looks different but don't expect it to change much through to the next election. While the whole charade achieves nothing in policy terms, it's the reliable political manna on which the Abbott leadership is nourished.

And what's wrong with that, you might ask. If that's what it takes to throw out what Abbott calls "the worst government in Australian history," so be it, right?

Shame Australia. If this government, which presides over an economy with strong GDP growth, low inflation, low unemployment and low interest rates, is the worst in our history, voters deserve to know why that is.

And the answer being given just doesn't stack up – namely that the carbon tax will scupper the economy. That's what all those electricity bills being read out in parliament are supposed to demonstrate.

On the face of it, the arguments are impressive – $25,000 in extra bills for an SME here, 15 per cent higher bills for another there. It's easy to see why only economic devastation can follow... if, that is, one is all but innumerate.

Because every number read out is what statisticians call a 'raw number'. Each accompanying argument is a raw number fallacy.

The Coalition is making much of the fact that the carbon tax is raising electricity bills around 10 per cent across the board, according to Treasury's own modelling. And unlike the GST, which involves a 10 per cent impost only at the final stage of the supply chain (the sale to the end consumer), the carbon tax compounds through every stage of the supply chain.

That sounds awfully scary. The longer a business’s supply chain, the more times that 10 per cent hike in energy bills is passed on as a price hike. All true.

What the argument does not acknowledge is the small proportion of costs this represents.

Tiny, in fact.

The sheer weight of raw numbers being studiously gathered from the business community, to dump in Labor's lap, is establishing a ludicrous orthodoxy that runs something like this: energy is our most important input cost, it's gone up a whopping 10 per cent thanks to the carbon tax, and we'll all be rooned.

This orthodoxy has no substance. None. Energy is not, for the vast bulk businesses (and households for that matter) even close to being the biggest input cost.

A report from the Australian Industry Group last month spelled this out in the clearest possible terms:

The 'Energy Shock' report found, based on its own survey, that "on average, 27 per cent of respondents spent the equivalent of more than 2 per cent of their sales revenue on energy, while only 7 per cent of respondents spent the equivalent of more than 5 per cent of their sales revenue on energy. Forty-six per cent of businesses reported an energy spend of less than 1 per cent of their turnover, and 73 per cent of respondents spent 2 per cent or less".

If a company's supply chain was long, and involved only suppliers in that 7 per cent with power bills worth more than 5 per cent of turnover, there might be a real problem. The compounding formula, assuming a 10 per cent rise in average power bills attributable to the carbon tax, would be, say, 10 per cent of 5 per cent, compounding down the supply chain.

That's a compounding increase in costs of 0.5 per cent at every stage. That is, the firm at the end of the supply chain would have to multiply the cost attributable to each stage of that chain by 1.005.

And that's only for a firm that has all of its suppliers coming from that top 7 per cent of energy users. The more typical experience will be, say, for a 10 per cent increase in power bills that represent about 2 per cent of costs for every link in the supply chain. That is, you'd have to multiply to cost of each stage of production by 1.002.

That's the figure that will most commonly compound down the supply chain. And while it's quite capable of producing scary raw numbers – $25,000! – those numbers cannot be understood unless expressed as a percentage of the final firm's cost structure.

Exactly the same mistake is made when discussing household power bills – the householder looks at a quarterly electricity bill of, say $450 per quarter, or $150 per month and clutches his or her head and says "I can't afford 10 per cent on top of that!", without really acknowledging how tiny a $15 per quarter price hike is against the rest of the family budget.

For a family taking home, say, a modest $6000 a month, $15 would be a blowout in their cost base of 0.25 per cent. Even if the government had not provided tax breaks, pension increases and family tax benefits to offset this cost, households would not be ruined. Businesses won't be ruined.

How do we know that? Because power bills have already jumped around 50 per cent in the past three years – that price rise has already compounded along the supply chain and has, for the most part, been absorbed by households and businesses.

So let me be as clear as I can: the raw numbers being used to attack the carbon tax in fact say nothing about the carbon tax unless they are expressed as a percentage increase in a business's overall cost structure. The Council of Small Business Associations has even created a Carbon Tax Calculator to remind panicked business owners that, when set against their major input costs – labour, cost of capital and so on – the carbon tax increase is really nothing to panic about.

And that's the problem with federal politics right now. There are issues that we should be panicking about, just not this one.

The entire Gillard era of Australia history will have been dominated by the 'ruinous' carbon tax, when it will play almost no role in our ruination.

As I have written several time in past month, there is a much bigger danger looming – namely what will happen to federal and state government finances when, as we are seeing day by day, commodity prices slide and our already stretched tax base weakens further.

What will the federal government, which is currently carrying close to 10 per cent of GDP in net debt, do when a China-induced tumble in tax receipts happens? What will it do when it needs to bail out the banks in the event of a further fall in property prices?

These, for me, are the big issues of the day. Our entire political economy is geared to a mining boom that is now ending, and nobody yet has put forward a plan to pay off our debts, rebuild the ailing tax base, and brace for hard times ahead.

Instead of tackling that gargantuan risk to Australian businesses and Australian families, the daily political news cycle revolves around the raw numbers of a 'calamitous' carbon tax impost that, in relative terms, is the gnat on the bum of the elephant in the room.