Reforming solar cross-subsidy is good policy, but unclear why $3.4 billion should be locked up in Cost of Living Fund

The Government’s apparent plan to end the cross-subsidy from households without solar cells to those with solar cells, and to fund the feed-in tariff through an explicit subsidy, is a sound one (see Brisbane Times coverage Power bills to come down: Newman). Effectively, it is spreading the cost of a poor decision by a previous Government across all Queensland taxpayers, rather than punishing those households which weren’t quick enough, informed enough, or which couldn’t afford to install solar cells at the time.

While I’m supportive of the policy, I’m unsure about the funding mechanism. It doesn’t seem sensible for the Government to lock up $3.4 billion so it can earn enough interest to pay the several hundred million dollars required for the subsidy each year. When I was a Manager in Commonwealth Treasury’s Budget Policy Division during the financial crisis, it became pretty obvious to me that earmarking government funds for specific uses over an extended period (e.g. the Nation Building Funds) was generally a dumb idea. You’re tying up, for a long time, a big chunk of money that might have a better, more urgent use (e.g. paying the Government’s bills).

Rather than having the $3.4 billion sit in a Cost of Living Fund, I would prefer the Government did the following:

  • it uses the $3.4 billion it would put in the Fund to pay off additional debt, reducing our interest bill further and increasing our chance of getting back our AAA credit rating, and
  • it finds the several hundred million dollars it needs for the subsidy each year through forcing further efficiencies on government agencies and through higher user charges where appropriate.

It should be possible to do this given the annual State Budget is around $50 billion. It appears unnecessary to lock up $3.4 billion in a Fund when it could be better used to pay off State debt and to maximise our chance of getting our AAA credit rating back.

Of course, the Government might find it politically unpalatable to make the full range of cuts and increases in charges that might be necessary to fund the subsidy if it doesn’t come out of a Cost of Living Fund. But the interest savings from paying off $3.4 billion in debt would cover a large part of the subsidy, meaning the savings it would need to find wouldn’t be as great. Of course, I would prefer that it fully fund the subsidy through offsetting cuts to programs or increases in user charges, as I’d like to see any interest savings fully reflected in an improved budget balance. We essentially need to use all the interest savings from debt reduction to offset forgone dividends when assets are leased out, so we shouldn’t be allocating interest savings to other uses.

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3 Responses to Reforming solar cross-subsidy is good policy, but unclear why $3.4 billion should be locked up in Cost of Living Fund

  1. KT says:

    Agree Gene, however with the Newman govt struggling in the polls they need a sweetener.. I don’t agree with it but I think its going to be a reality. I like solar power idea – why not subsidise people getting the panels much like rainwater tanks a few years back.

    • Gene Tunny says:

      Thanks for the comment, KT. There’s a case for supporting basic R&D into solar power which hopefully will make it more cost-competitive as an energy source, but I can’t see a case for subsidising the panels themselves.

  2. KT says:

    I see a case for subsidising on environmental grounds only. Rainwater tanks did make the public more water savvy. however, those subsidies were done in better economic times

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