The Great Australian Soap Opera

13 mins. to read
The Great Australian Soap Opera

Australian politics has much in common with the country’s most famous TV soap. But the real issue right now is whether Australia can sustain its remarkable prosperity in a more uncertain world.

Everybody needs good neighbours: Mr Turnbull under pressure

On 09 April The Australianproclaimed that Malcolm Turnbull, the Australian Prime Minister, had “lost” the monthly Newspollfor the thirtieth consecutive month. The Newspollis a monthly snapshot of the nation’s political preferences as between the two main political parties at the Federal level – Labor (led by Bill Shorten) and the Liberal-National Coalition[i](led by Mr Turnbull). 52 percent of the 1,597 Australian voters polled favoured Labor while 48 percent backed the Liberals.

So what? This is a big deal for Mr Turnbull and for the entire Australian political class because it was precisely a 30-month period of negative Newspolls that brought about the fall of Mr Turnbull’s predecessor as PM, Tony Abbott. Mr Turnbull toppled Mr Abbott in a bitterly conducted palace coup in September 2015, arguing that Mr Abbott, elected in September 2013, was damaged goods, and that only he could restore the party’s and the government’s fortunes. Mr Turnbull then went on narrowly to win the Federal election of 02 July 2016, gaining 76 seats in the House of Representatives as against Labor’s 69.

Anyone who is familiar with British politics will know how poor Mrs May has been dogged throughout her brief premiership with lurid speculation about how she is about to be undone by dark forces within the British Tory Party. But Mr Turnbull’s political longevity of late has looked even more precarious than Mrs May’s. Australia is rife with political rumour. One hears that Mr Abbott is going to wreak his revenge; that Julia Bishop (Mr Turnbull’s deputy and the country’s Foreign Minister) is sharpening her blade; that the Coalition has lost confidence in a vacillating leader. All this, of course, is music to Labor’s ears and to those of the upcoming third force in Australian politics, the Greens.

The problem is that Australia has become inured to political assassination. As in the later Roman Empire, leaders are regularly despatched with casual butchery. Kevin Rudd, the Labor Prime Minister from December 2007 was deposed by his deputy, Julia Gillard in June 2010. Ms Gillard, sadly, did not cut the mustard and was, in turn, deposed by the resurgent Mr Rudd in June 2013 – who then went on to lose the election to Mr Abbott in September of that year.

This kind of political infighting is facilitated by the very Australian institution of the political spill. In Australian politics a leadership spillis a declaration that the leadership of a parliamentary party is vacant and open for re-election. A spillmay involve any leadership positions (leader and deputy leader in both houses), or just the leader. Where a rival to the existing leader calls for a spill, it is called what it actually is: a leadership challenge. Mr Turnbull, right now, is living in fear of a spill. Like in a reality TV show, he knows that he can be voted down as soon as the viewing public decide they have lost faith in him.

Neighbours need to get to know each other: Policy issues

Of course, one is tempted to take the view that personalities in politics do not really matter. Many Australians will have to stifle yawns if Ms Bishop does the dastardly deed and deposes Mr Turnbull. What does matter, however, is the overall direction of government policy. And there are three issues it seems to me, as I drink in the Australian scene, which bear down on the country’s continuing prosperity. These are: energy policy; fiscal policy; and foreign (Chinese) policy.

Neighbours should be there for one another: Energy Policy

An enormous amount of media attention has been devoted here over the last week or so to the decision by AGL Energy (ASX:AGL)to close the Liddell coal-fired power station in the Hunter Valley, New South Wales in 2022 because, supposedly, it was uneconomic. (It costs AU$106 to produce one megawatt hour there versus AU$83 for “clean” energy.) Liddell produces enough power for about ten percent of consumption in New South Wales. This follows on from the closure of another coal-powered power plant, Hazelwood in Victoria, last year.

The head of the country’s biggest manufacturer, Bluescope Steel (ASX:BSL), warned this week that the closure of Liddell will lead to a dysfunctional energy market. BlueScope’s energy bill has more than doubled in the past two years – as has that of many households.

What is really at issue here is that the Australian political establishment has been – and continues to be – incapable of formulating an energy policy that is fit for purpose.

What is really at issue here is that the Australian political establishment has been – and continues to be – incapable of formulating an energy policy that is fit for purpose. If that resonates with British readers, the policy debate in Australia is more raucous – and much more entertaining.

Last week a delegation of manufacturing sector chief executives went to Canberra to meet Energy Minister Josh Frydenberg. They want AGL to sell the plant to another energy company. Alinta Energy (owned by Chow Tai Fookof Hong Kong), Delta Energy and China’s Shandong Xinchao Energy (SHA:600777)have already expressed interest.

There is deep division within the Coalition Party about the future of coal in the energy mix. Mr Turnbull and others want to phase out coal-power altogether; others – principally former PM Tony Abbott – see it as a vital backstop. The heart of the problem is that policy decisions made some time ago have had unforeseen consequences. Australia’s adhesion to the Paris Accord on climate change obliges the country to reduce its CO2 emissions by 26 percent by 2036. Australia has 20 coal-fired power stations with an average age of 27 years. They will all have to be replaced within the next twenty years or so.

In 2001 the Federal Australian government of Prime Minister John Howard introduced the system of Renewable Energy Targets(RETs). Mandatory renewable energy targets are schemes whereby electricity retailers are required to source specific proportions of total electricity sales from renewable energy sources according to a fixed time frame. The purpose of these schemes is to promote renewable energy and reduce dependency on fossil fuels. If this results in higher electricity costs, the additional cost is distributed across most customers by increases in tariffs. Although the cost of renewables has been falling of late, the transition to renewables has still put upward pressure on electricity prices.

About 67 countries have RETs of one kind or another. All EU member states have legally binding renewable energy targets. The EU baseline target is 20 percent by 2020, while the USA also has a national RET of 20 percent (for the moment at least). Similarly, Canada has nine provincial RETs but no national target. Australia’s renewable energy target does not cover heating or transport, as Europe’s does. It is therefore quite modest – equivalent to approximately five percent of all energy from renewable sources. However, Australia is desperately trying to ramp up generation of electricity from renewable sources. Solar power is favoured as Australia is blessed with lots of sunshine.

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Currently, there is an unprecedented 30GW of proposed renewable energy projects in the pipeline in New South Wales alone. The RET is on target to cost AU$2.3 billion this year in subsidies. Some critics say that RETs are failing to develop the wind and solar energy projects in the right places. Generators are incentivised to develop renewable projects near existing transmission lines, where connection costs are lowest – regardless of local demand. Moreover, solar arrays can be constructed much more quickly than the transmission networks needed to carry the electricity to where it is needed.

One Coalition backbench group (known as the Monash Forum[ii]– apparently backed by ex-PM Tony Abbott) wants a new taxpayer-funded “clean” coal-fired power station – but this has been rejected by the Prime Minister. The Prime Minister, in turn, has been criticised for announcing a new hydro-power project, Snowy Mountains 2.0, at a cost of over AU$10 billion to the Australian taxpayer – with no business case to support it[iii].

New investment under the RET will end in 2020 and RET cross-subsidies will end in 2030. Egregious state-level subsidies to solar projects will not end for many years – but then Mr Turnbull does not have the power to end these.

The Turnbull government, however, has been accused of forcing the closure of the Liddell power station in order to drive up power prices. Australia’s biggest coalminer, Glencore (LON:GLEN), has warned that the closure of Liddell could cause businesses to shut down.

Most young Australians are born-again climate warriors who want Australia to get all of its power from renewables. Yet modelling undertaken by the government for its National Energy Guaranteeprogramme suggests that Australia will still be 60 percent dependent on coal-generated power in 2030.

The cuts in CO2 emissions that Australia hopes to achieve going forward will all be cancelled out by increases in China’s carbon emissions – the irony being that many Chinese coal-fired power stations run on Australian-dug coal!

Just a friendly wave each morning: Fiscal policy

Some more conservative Australian commentators are appalled that the state spending as a percentage of GDP is approaching 25 percent…In Europe that is a metric that was abandoned years ago: France has a state spend of about 55 percent of GDP. Nevertheless, the direction of travel is clear. Australia, a country where it has always been easy to set up and run a business, is slowly becoming a fully paid-up welfare state.

Again, this is a product of the Dutch auction of a tight two-party system. Labor promises more goodies; the Coalition balks – and then outbids them. Mr Turnbull, looking stressed, delivered a new package of child welfare spending on Monday morning…

The National Disability Insurance Scheme, the Gonski[iv]school funding reforms and the cost of Australia’s hybrid state-funded stroke personal medical insurance-based healthcare system are rocketing. Most Australians have universal access to state-funded healthcare but those earning over AU$90,000 this year (£49,000 – about the average income in New South Wales, though not elsewhere) will be required to subscribe to health insurance schemes which typically cost well over AU$100 per month for a single individual.

But the real issue is one shared by other advanced Western countries. Young people have worked out that they will never get the pension tax breaks that their parents got at a time when property prices have been going through the roof. (Though, house prices are under pressure now, as I reported last week).

As in Europe, more children are living at home in their late 20s and many are even coming back to live in the premises of Bank of Mum & Dadafter that. The smashed avocado generation(as they are called over here – as that is what they order for breakfast in coffee bars) has now given up saving for a house deposit as house prices have risen faster than incomes.

Despite high wages – the Minimum Wagein Australia is AU$17.17 (£9.38) per hour – commentators like Chris Mitchell of The Australianbelieve that young Australians have now chosen consumption over saving[v]. Typical Australian homes today cost four times household incomes compared to only 2.5 times 20 years ago. Since 1986, according to Mr Mitchell, home ownership in the 25-34-year-old bracket has fallen from 58 percent to 45 percent.

What’s more, many lower-income earners, especially women, are retiring in Australia with insufficient pension benefits. The young, who face lower wage growth and rising housing costs, are reluctant to shell out higher taxes to bail out distressed baby boomers. Meanwhile, very wealthy Australians have been indulged with incredible pension tax perks. There is no limit to the number of properties that an individual pension scheme or a family trust can own – even if geared to the hilt…Australia is indeed a brave land for billionaires to prosper further.

On the jobs front, Australia’s unemployment rate rose marginally from 5.5 percent to 5.6 percent in February. But only one in five refugees received in the last five years is in full-time employment: there are huge issues around social integration.

When good neighbours become good friends…The Chinese threat

On 10 April ABC News reported that China was negotiating with the island state of Vanuatu to establish a military base there. The Australian political class were dumbfounded. Vanuatu is in our sphere of influencesaid one commentator. We don’t want great power politics down heresaid another…

Despite its Anglo-French pedigree, the Republic of Vanuatu is a member of the Commonwealth: indeed Prince Charles popped over there from the Gold Coast earlier this week – chaperoned by Ms Bishop – where he was, inevitably, wreathed in garlands.

Unfortunately,The Lucky Countrythinks that we are living in a world that will always smile upon its glorious isolation and exceptionalism: the Chinese will continue to thank them for their minerals and pay the market price – and will continue to leave them alone while buying up their power generation facilities and other strategic industries.

The Australian academic Clive Hamilton believes that China is slowly, subtly and surely turning Australia into a puppet state.

That is not how a few Australian analysts see it, however. The Australian academic Clive Hamilton believes that China is slowly, subtly and surely turning Australia into a puppet state – and the Australian elite is in a state of denial about this. Indeed, they have been complicit. In his book Silent Invasionhe unfolds how, from politics through business to culture, China is strategically infiltrating Australia. In real estate and agriculture, universities and unions, and even in the country’s primary schools, Mr Hamilton has uncovered compelling evidence of the Chinese Communist Party’s manipulation of the country. It is, says Mr Hamilton, no exaggeration to say the Chinese Communist Party and Australian democracy are ona collision course.

Please don’t get me wrong. Australia’s very significant Chinese community has made a huge contribution to Australia’s prosperity. Nearly 200,000 Chinese have migrated to Australia since 2011[vi]. But the Chinese state, of course, sees them as a geopolitical asset – grist to its strategic mill. Australian politicians have indulged China. Anecdotally, it is easier for a Chinese to get residence here than a Brit.

I have long been in love with Australia from afar. Now here though, it strikes me that the studied casualness of Australia’s second-rate political class (another thing they have in common with the Poms) conceals a dangerous complacency. The English talk aboutmuddling through– a foolish illusion. The Aussies assume the sun will always shine on them.

I sincerely hope they are right.

The onward journey

It was a balmy 26 degrees on Bondi Beach yesterday: moderate winds but a splendid swell…But today, downtown Sydney endured an unseasonable 34C. I spent the late morning looking at 20th-century Australian paintings at the Art Gallery of New South Wales. My Uber driver, Sean, summoned out of the ether within the flick of an eyelid to take me to my lunch appointment at the Café Sydney, hailed from the fair city of Dublin. What brought you here?I asked. Quality of life, mate.

And it’s true: they have that here in enviable abundance.

I have only scratched the surface here – but, just three hours away, there is another realm…I’m heading to New Zealand where I have even more cousins than here. New Zealand is a fascinating model for economists in terms of what will probably happen to UK agriculture post-Brexit.

I’ll have more important stories to tell for investors. Stay tuned.

[i]Historically, the party was a merger of the Liberal Party and various rural and nationalist parties which at various times called themselves the Country Party. Confusingly for non-Australians, Mr Turnbull is often described as leading “the Liberals” or “the Coalition”.

[ii]Named after Sir John Monash, an Australian hero of WWI.

[iii]Turnbull Snow Job Opens door to Coal Confusion, by Paul Kerin, Australian Weekend, 09 April 2018.

[iv]Named after David Gonski, a prominent businessman and philanthropist.

[v]The Australian, Monday, 09 April 2018.


Comments (1)

  • Mary Edwards says:

    All over the place – compiled from a jumble of ill understood media reports .

    There is no Coalition Party in Australia – there is a Coalition of two political parties each of whom have a name – google it!

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