Wednesday, May 31, 2006

The 'economics' of nuclear power in Australia

If you listen carefully to the new debate over nuclear power you can hear the sound of furnace doors being opened and bundles of the Treasury’s $100 notes being loaded on to shovels.

The Prime Minister says he wants to find out whether nuclear power is economically feasible in Australia. He must know that it is not a commercial proposition. There have already been enough reports prepared for his Government telling him so.

The most recent, prepared by a British scientist sympathetic to the nuclear industry for the Australian Nuclear Science and Technology Organisation (ANSTO) finds that any private operator who attempted to build a nuclear power plant in Australia would produce electricity ‘at a cost that is significantly higher than would a new coal-fired or gas-turbine power station.’

In many places overseas it is a different story. For countries that don’t have ready access to coal, are densely populated and are rapidly industrialising, then nuclear power might well be the ideal (perhaps, the only) commercial solution.

So what will the Australian Government do?

Well, I fear that it’ll do what it’s done before — notwithstanding its proclaimed commitment to the free market.

Back at the start of the 1980s, media moguls including the late Kerry Packer became fascinated with the idea of a national communications satellite. They wouldn’t build it or fund it themselves — as a business proposition, it made no sense. But persuading the Government (Malcolm Fraser Prime Minister, John Howard Treasurer) to part with its own money to ‘position Australia well for the future,’ the moguls played with the new technology for which they could never make a sound business case.

A decade later the government-owned aussat was $400 million in debt and derided as a piece of ‘space junk.’ The Hawke Government couldn’t give it away — literally. In order to persuade the firm that became Optus to take it off its hands, the Government threw in a domestic telephone licence.

AUSSAT was built and launched at a time when Australia was about to be covered by a web of cheaper-to-use optical fibre cable. In order to ensure that AUSSAT had paying customers the Government forced the ABC to use it exclusively to transmit its programs between Australian cities. But the economics of doing so were horrendous. Even after the ABC had paid for all of the transmission costs, the cost of an extra receiving dish was sometimes still more than the cost of using optic fibre cable.

I worked at the ABC during the 1980s and remember one instance when the ABC got around the spirit of the Government’s requirements by installing a cable between Sydney and Wollongong rather than buying yet another satellite receiver.

Smart people knew that AUSSAT made no financial sense. But it suited them for taxpayers to take the plunge and then take the bath.

Smart people are at it again.

The report prepared for ANSTO finds that a privately-owned nuclear power plant could only make money if the Government contributed 14.3 per cent of the cost of building it, and then paid 21.4 per cent of the electricity bills for the first 12 years. It’s a finding based on best-case assumptions. The interest rate used in the calculations is one of the lowest on record (that for 2002-2003), the plant is of a type not yet built, and it is assumed to be far cheaper than have been previous nuclear power plants.

It wouldn’t surprise me if the Government bites again.

Some of the arguments for it doing so are incredibly thin. The report for ANSTO says that a nuclear power plant would improve the security of electricity supplies ‘by adding diversity to Australia’s sources of electricity.’ This makes about as much sense for a nation built on top of a near-inexhaustible supply of coal as does the claim that Iran needs nuclear power in order to diversify away from oil.

It is correct that a nuclear plant might become more economic relative to coal-fired plants if the Government imposed a tax on carbon emissions and allowed carbon trading — something it has said it is not yet ready to do.

But if it did do so, all sorts of other actions might become more economic as well — among them the installation of technology to cut or offset the emissions from coal-fired power plants.

The market would decide. And my tax dollars would be safe.

Wouldn’t that be something?

Wednesday, May 10, 2006

A Super Budget. Not.

High-income earners do well indeed out of the tax cuts in the Federal Budget. Andrew Leigh from the Australian National University says that whereas an average worker will get an extra $510 a year, Malcolm Turnbull will get $6200.

But that’s just the beginning. The real gift to the well-off is in the plan to abolish the tax on superannuation payouts.

Don’t believe for a moment that the benefits will trickle down.

Lump sum payouts below about $130,000 are already untaxed...

Removing the tax won’t help low-income earners. But it will help high-income earners, and the higher the income the greater the help. This is partly because the higher your income the more you put into superannuation automatically; and partly because the higher your income the more spare cash you have to pump into superannuation over and above what is required.

And if you can get your employer to pump it in for you, there’s no better place for it...

High-income earners are well advised ‘salary sacrifice.’ They get their employer to cut their take-home salary by, say, $30,000 and put the money into superannuation instead. They no longer lose perhaps as much as half of that money in tax. They lose only the 15 per cent superannuation contributions tax. And any earnings the fund makes are taxed at only 15 per cent as well, instead of something closer to 50 per cent.

It’s such a rort for the well-heeled — who scarcely need encouragement to save for their retirement — that in his first (and some would say, only) courageous Budget Peter Costello introduced a superannuation surcharge for high-income earners of an extra 15 per cent, taking the total tax to a still-concessional 30 per cent.

Here’s what he told me at the time in an interview on the ABC’s AM program:

"At the moment if you’re on a 48 per cent marginal tax rate, and an employer makes a contribution into superannuation on your behalf, you get a 33 cent tax concession — if you are a millionaire or a multi-millionaire.

If you happen to be under $20,000, and an employer makes a contribution on your behalf, you get a 5 per cent tax concession.

Now, our tax system is premised on the fact that rates should go up as incomes go up. But under this superannuation system, concession goes up as income goes up. That’s the basic unfairness.

How do you look the battler in the eye and say ‘when your money goes into super, you get a 5 per cent tax concession. When a millionaire’s money goes into super, he gets a 33 per cent tax concession?"

Peter Costello’s concern about the rort for the rich was short-lived. About a decade later when his Party gained control of the Senate it abolished its own surcharge.

The only thing left standing in the way of Australia’s biggest government-created tax lurk was the superannuation exit tax of 16.5 per cent applied to lump sum payouts of more than $130,000.

The Treasurer now plans to remove that as well as part of his plan to ‘simplify and streamline’ superannuation. As the plan revealed on Budget night puts it, from mid 2007:

All lump sum benefits paid from a taxed source to an individual aged 60 or over would be tax free when paid. There would be no reasonable benefits limit.

In removing the last hurdle facing one of Australia’s last legal tax dodges the Treasurer hasn’t even pretended that superannuation is overtaxed. He knows it is not.

Three budgets ago at the lock-up press conference a television journalist who had presumably been worded up by the superannuation industry asked the Treasurer why superannuation was so heavily taxed, and taxed ‘three times’ — on the way in, as money is earned, and from the well-off on the way out.

Peter Costello’s reply sent a chill through some who listened. He said that, even after those three levels of tax, the overall tax take from money paid into a super fund was lower than it would have been if the money had been paid out in the form of wages.

His implicit threat: if you really think superannuation is heavily taxed — how would you like to be taxed at normal rates?

The Treasury’s estimate is that the concessional tax treatment for superannuation costs it an astonishing $16 billion a year. It is by far the biggest of Australia’s so-called ‘ tax expenditures.’ The extra tax breaks proposed in this latest Budget will push that bill up by an extra $2.4 billion each year.

There was scarcely pretence by the Treasurer on Budget night that the proposed extra tax break will boost national savings. As he put it, in his interview with Kerry O’Brien:

If you are thinking of saving, put some money in superannuation. When this plan goes through it will be the best way of saving.

Too right. Some of the money that was going to be saved anyway will be saved now in the form of superannuation. The rich and well-advised will get a much bigger tax cut than the one advertised, and the rest of us will pay an extra $2.4 billion to give it to them.

The superannuation plan isn’t a done deal — yet. The Treasurer has called for comments. He wants them by 9 August.