RBA is copying the Fed as Michael Knox forecast

In my previous post, I discussed my latest podcast chat with Morgans Chief Economist Michael Knox who forecast the RBA would today increase the cash rate to 0.85%, as it did. As Michael noted, the RBA has been copying the US Federal Reserve (with a slight lag now) since late 2020. See the chart below comparing the RBA’s overnight cash rate target with the US Effective Federal Funds Rate (currently 0.83%). One reason this is the case is the RBA is wanting to avoid a significant depreciation of the currency which would contribute to inflation through higher prices of imported goods (see my 7 May post Economic update: interest rates, monetary policy, fiscal policy, and coal prices).

The RBA’s cash rate target is tracking the US Effective Federal Funds Rate managed by the US Federal Reserve.

From what I can tell, Michael was the only market economist who forecast a 50 basis points increase in the cash rate to 0.85%, so he’s definitely going into the Economic Forecasting Hall of Fame for this successful prediction. Take a bow Michael Knox. If you’re a QEW reader and you’re not following Michael’s commentary already, you should consider either following his podcast or his YouTube videos on the Morgans channel.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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RBA’s next move: 25, 40, or 50 basis points? Michael Knox says 50 on Economics Explored

Next Tuesday, the RBA will increase the cash rate again, but it’s uncertain by just how much. Reuters is reporting RBA to raise rates a modest 25 bps in June, some call for 40 bps, where bps stands for basis points, which are one-hundredths of one percentage point. For my latest Economics Explored podcast episode, Morgans Chief Economist Michael Knox and I had a great conversation on the US and Australian economic outlooks, in which we considered the next moves for the US Federal Reserve and our RBA. Michael thinks the RBA is basically following the Fed and hence, on Tuesday, will push the cash rate up to 0.85%, a 50 basis points increase from the current cash rate of 0.35%. This will mean our cash rate will be practically the same as the US Effective Federal Funds Rate, currently at 0.83%. Michael is making a big call here. He appears to be the only market economist forecasting a 50 basis points hike. For sure, Michael will enter the economic forecasting hall of fame if he gets this one right.

Sculpture of RBA symbol outside RBA HQ, Martin Place, Sydney.

You can listen to our conversation about future interest rate increases from 15:32 in episode 142 of my podcast via podcast apps, including Google Podcasts and Apple Podcasts, or using the embedded player below. Of course, I’d recommend you listen to the whole episode for a whole bunch of great insights from Michael, who is one of Australia’s top market economists and commentators. You may also be interested in Michael’s recent economic research notes which I’ve linked to in the show notes, one of which is Watch the RBA copy the FED.

Next week’s cash rate increase won’t be the last one. Michael is expecting the Australian cash rate will (or, more precisely, should) end up at 2.6% by the end of the year, to match what he’s forecasting the Effective Funds Rate will end up at (i.e. 2.58%). Incidentally, rising interest rates across the economy will of course impact housing credit and house prices which are already starting to fall, although Brisbane house prices have temporarily defied the national trend for capital cities (see the ABS News report House prices fall for the first time in nearly two years as rising interest rates bite).

Michael Knox, Morgans Chief Economist

Despite rising interest rates, both Michael and I are very optimistic about the US and Australian economies, but it goes without saying that the unexpected can always occur. The so-called east coast energy crisis is something that could compromise the economic outlook if the new federal government can’t come up with a convincing response next week. I’ll aim to cover this issue in a future post, after I’ve weighed up all the evidence and the competing claims from the different sides in the debate.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Super-high coal royalties to help address Qld hospitals crisis

As I predicted earlier this month (see John McCarthy’s 13 May InQld article), the Queensland Government will be boosting health spending in the upcoming budget to deal with the hospitals crisis, and to a large extent it’s able to do this because of booming coal royalties. Nine News last night reported Queensland Premier promises a ‘record health budget’ amid crisis. The Government will also be providing a $175 electricity bill rebate, which doesn’t make sense from an economic perspective, but could be justified as an equity measure (and hence, ideally, it should be targeted at those most in need). 

We’re talking billions of extra dollars to the state government this financial year and next due to higher coal royalties. It’s difficult to quantify precisely because of the uncertainty around how long the crazily high coal prices caused by the Ukraine war will last (see below, noting the ICE Newcastle Coal price is for thermal/steam coal). 

The state budget will also benefit from an economy that is in better shape than anyone would have predicted late last year when the state Treasury prepared the mid-year budget update. In the budget update, Queensland Treasury forecast the state unemployment rate would average 5.25% over 2021-22 and 5% over 2022-23. Currently the Queensland unemployment rate is 4.5% and it’s averaged 4.7% so far this financial year (see chart below). This will mean hundreds of millions of dollars of extra payroll tax revenue. Incidentally, I should note the jump in the state unemployment rate from 4% to 4.5% in April is probably statistical noise rather than signal. 

Additionally, there’s the likelihood that the Treasury substantially under-estimated stamp duty revenue at the time it prepared the mid-year update last year. We know the Queensland property market is being super-charged by interstate buyers who’ve finally realised all the advantages Queensland has to offer – even if we do seem to have recurring crises in the delivery of public services by successive state governments (one of the themes of my 2018 book Beautiful One Day, Broke the Next). Net interstate migration is currently running at around 40k per annum (see chart below).

Finally, we saw signs of state business capital spending picking up in the latest March quarter data released by the ABS yesterday, although business capital spending is still nowhere near what it was during that incredible boom in the first half of last decade when the $70 billion Curtis Island LNG terminals were under construction (see chart below). State business capital spending was up 1.7% in March quarter, while nationally it had a slight fall of 0.3% (see the ABS report).

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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If you’re sick of politics BAU, check out my Pirate Party economics podcast interview

What does the economic policy platform of a Pirate Party look like? What does it say about intellectual property protection (i.e. copyright and patents), the Right to Repair, UBI, taxation, and business support? And what type of pirates are Pirate Parties inspired by exactly: Captain Jack Sparrow or Kim Dotcom? Pirate Party Australia Treasurer John August (a Fusion Party candidate for Bennelong in the 2022 federal election) answers these questions in a conversation with me in the latest episode of my Economics Explored podcast. For a sample of what John has to say, check out the video clip below.

You can listen to the full conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps. A transcript and relevant links are available via the Economics Explored website.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

Posted in Budget, Industry policy, Macroeconomy, Social policy, Tax, Trade | Leave a comment

Economic update: interest rates, monetary policy, fiscal policy, and coal prices

The election debate would benefit from a clear understanding of the factors affecting interest rates, now that the RBA has increased the cash rate from the “emergency level” of 0.1%, practically the lowest it could go, to the still extraordinarily low 0.35%. First, both actions of the RBA and the government are relevant, although the RBA is the most important actor, as it is responsible for monetary policy, which is the main policy instrument for targeting inflation and keeping it in the 2-3% range, which it has now exceeded (see chart below). Second, both domestic and international factors are relevant, with the exchange rate playing an important role in the impact of domestic monetary policy.

Domestic factors

Inflation is a monetary phenomenon, and, ultimately, what the RBA is doing through manipulating the overnight cash rate is affecting the stock (or supply) of money in the Australian economy. The link between money supply growth and inflation may not be strong in the short-run, but is strong in the long-run, an important lesson from Milton Friedman.

Associated with the accelerating inflation we are now experiencing is the large growth we have seen in the money supply, due both to quantitative easing and the housing credit boom (see chart below). Australian households and businesses have a greater stock of money in their bank accounts (M3 has expanded 20% since March 2020), boosting their real money balances, to use the jargon, and prices have to catch up. There has been too much money chasing too few goods, as Friedman would have described it. Interest rates need to rise to reduce housing credit and money supply growth. Arguably, RBA monetary policy was too aggressive during the pandemic, sparking the housing credit boom and crazy increases in property prices across Australia.   

This is not to say the government is irrelevant. Its fiscal policy stance can certainly contribute to inflationary pressures, through its influence on aggregate demand, which can contribute to the economy overheating, so to speak. The federal budget stance is probably too expansionary given robust economic conditions – i.e. given the robust recovery, the federal government shouldn’t be planning a “cash splash” and expecting to run a $78 billion deficit in 2022-23 (see the 2022-23 Budget). The deficit should be much less, as suggested by the size of the estimated structural deficit (plus temporary measures), which appears to be a bit over 5% of GDP in the current financial year (i.e. over $100 billion) and 4-4.5% of GDP in 2022-23 (see Chart 3.15 on p. 105 of Budget Paper 1).

That said, the federal opposition won’t tighten fiscal policy if it wins the election, so it can’t criticise the government over this. Indeed, it’s being reported the federal opposition will increase budget deficits, although the Australian’s reporting of Labor turbocharging budget deficits appears a bit over the top if they’re talking about $10 billion over four years, which is a fraction of currently projected deficits. The federal opposition is claiming it will relieve inflationary pressures through improving the supply-side of the economy, through investing in education and improving child care support. Such measures may have some small salutary effects but would take time and wouldn’t address the fundamental problem that inflation is accelerating, inflation expectations are rising (see chart below), and there is no alternative but to increase rates. We don’t want to end up with inflationary expectations guaranteeing future inflation through wage and contract bargaining. If that occurs, the RBA may need to increase interest rates to punishing levels to get inflation back into the 2-3% range. Where interest rates will end up is anyone’s guess, but a 2 to 3 percentage point increase seems plausible at this point. 

Given the well known long and variable lags in monetary policy (see Assistant Governor Luci Ellis’s 2018 speech On Lags), the RBA probably should have acted earlier. There is a chance they acted too late, possibly because they were so adamant for so long they wouldn’t raise the cash rate until 2024 and they delayed until the last possible moment. Dennis Atkins at In Queensland and Steve Kates at New Catallaxy have written great articles criticising RBA decision making.

Certainly, other central banks, particularly New Zealand’s, have acted earlier and more aggressively than the RBA (see chart below), and the RBA may have made its biggest monetary policy blunder since the overly-restrictive monetary policy prior to the early-nineties recession – this time in the other direction. Now, the US Fed has shocked financial markets with its recent 0.5% policy rate hike, and there’s speculation of a coming US recession, so, as always, the future remains uncertain, and forecasting macroeconomic variables can make economists look foolish.  

International factors

It’s probably impossible to fully untangle domestic and international factors in influencing inflation and interest rates, because we’re so integrated into the global economy, but let’s think about the linkages. 

First, there is the correlation of economic activity across countries, transmitted via international trade, real interest rates and borrowing costs globally, or via common shocks (e.g. the pandemic). Major economies are rebounding from the pandemic recession and, hence, interest rates are rising at the same time across economies. 

Second, there is the fact that our real (i.e. inflation adjusted) interest rates can’t deviate too far from those in other countries because that will affect capital flows (i.e. if our real interest rate is lower, fewer foreign investors would buy Australian bonds) and this will affect the exchange rate. So if major economies are tightening their monetary policies, and their real interest rates are increasing, and, if we don’t do the same, then we become a less attractive destination to invest in and we experience a real currency depreciation. While good for exporters, this is bad for consumers and would contribute to domestic inflation through higher import prices (and through its impacts on exports it could contribute to over-heating). This means the RBA faces a difficult balancing act. It may not want to increase interest rates as aggressively as other central banks, for fear of slowing the economy too much or crashing house prices, but this would mean a depreciating currency and imported inflation.  

The outlook from here

I expect we’ll have to endure an extended period of much higher inflation than we expected, but output and employment outcomes should remain strong for the next year or so at least. Among other positive contributors, the Queensland economy and state budget are getting a substantial boost from the super-high coal prices we’ve seen (see chart below, noting the ICE Newcastle coal price is for thermal coal). 

This is going to mean billions of extra dollars for the Queensland budget. The state government should use this windfall to reduce its borrowings so it can limit the impact of rising interest rates (see chart below), which will lift its debt servicing costs (the interest expenses line item in the budget) in coming years.

Finally, on the robust economic recovery, John McCarthy has a good report at In Queensland covering the latest retail trade data: Perfect swarm: Consumers head back to the shops as investors target Queensland. People are certainly out-and-about more in Queensland than in southern states, as you can see from Google mobility data (see chart below). There is a big drop in the penultimate data point for Queensland in this chart which is related to the Labour day holiday. Incidentally, even on the days when other states have a public holiday, Queensland mobility is lower on those days, too, probably because of our more restrictive retailing trading regulations. 

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Coaldrake integrity inquiry submission

Professor Peter Coaldrake appears to be doing a great job in his Review of culture and accountability in the Queensland public sector, and I’ve been impressed by his findings in his interim report regarding the politicisation of the public service, something which has been of concern for many years. I’m going to provide a submission to the inquiry, encouraging Professor Coaldrake to think about the implications of the integrity issues he’s identified for Queensland’s public financial management. A first draft of my submission is provided below and I’d welcome any comments and suggestions.

Draft submission to Coaldrake Review of culture and accountability in the Queensland public sector

Dear Professor Coaldrake

Your review has revealed some important concerns regarding culture and accountability in the Queensland public sector so far, and I would encourage you to delve deeper, particularly into what it means for public financial management. 

As a former public servant who has held various roles in the Australian Treasury and Queensland Government agencies, I have become concerned about some recent financial manoeuvres by the state government. These actions raise questions about: 

  • the integrity and reliability of the public financial accounts over the long-term as the impacts of these various fiscal manoeuvres accumulate (i.e. we may be fooled into thinking the state’s financial position is much better than it actually is, meaning governments could spend more than is desirable); and 
  • the ability of the state public service, particularly the state Treasury, to provide frank and fearless advice. 

The most egregious financial manoeuvre was the 2021 fake privatisation of the Titles Registry, which was designed to reduce Queensland’s reported net debt, but in a way that, in my view, was contrary to well-established government accounting principles. I have developed this argument in two articles on Queensland Economy Watch which I would refer you to:  

https://queenslandeconomywatch.com/2022/02/04/qld-titles-registry-trickery-should-be-investigated-in-integrity-inquiry/

https://queenslandeconomywatch.com/2022/01/17/fake-privatisation-of-titles-registry-helping-qld-govt-pretend-it-has-debt-management-plan/

Also worth investigating by your review is the Government’s current proposal to shift residential tenancy bonds being held in trust by the Residential Tenancies Authority (RTA) into the Queensland Government’s bank account. This has prompted strong criticism by the Real Estate Institute of Queensland (REIQ) and Tenants Queensland. In its 1 April 2022 submission to the Queensland Parliament’s Economics and Governance Committee REIQ observed:

The RTA currently holds close to $1 billion of rental bonds for Queensland tenants. The proposed amendments to the RTRA [Residential Tenancies and Rooming Accommodation] Act have the effect of allocating these funds to the Government’s operating bank account (and its balance sheet).  These monies belong to Queenslanders and they should remain held by the RTA ‘on trust’. 

Depending on the specific accounting treatment, this could be another tricky way to claim a reduction in net debt without actually improving the state government’s net financial worth, and hence it could lead to poorer government budget management. 

With the authority given to you by this review, you have the power and responsibility to uncover the truth about these questionable financial manoeuvres. Ultimately, integrity concerns could have real costs to taxpayers through poorer public financial management. Hence it is important that your review considers these matters.

Queensland Parliament House, corner of Alice and George Streets, Brisbane.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Unemployment and state budgets update

On Monday, I appeared on the 612 ABC Brisbane Radio Drive program (from 2:09:00) to chat with Kelly Higgins-Devine about how we estimate the unemployment rate, a matter of interest that day obviously due to the Opposition Leader being unable to remember the 4% national unemployment rate. I mentioned the ABS methodology is based on internationally-consistent definitions agreed via a forum organised by the ILO, and that the ABS undertakes a comprehensive survey of around 26k households (see Labour Force Survey methodology). 

That said, the ABS may need to undertake a public information campaign to improve public confidence in its labour force data. Based on the questions I received from Kelly on the Drive program, there appears to be a lot of scepticism in the community about the data, largely because, technically, you are counted as employed if you only work an hour per week. But as the ABS has pointed out in a post How many people work one hour a week?: “Only a very small number of people usually work one hour a week – most of whom would not like to work any more hours.” It’s only about 15k people or 0.1% of all employed people in Australia. The vast majority of Australians work more hours than that (e.g. see chart below).

Another point I made was that it’s not as if the ABS is hiding the fact that some people working part-time (i.e. less than 35 hours per week) would like to work more hours. The ABS produces an underemployment rate estimate (see chart below), and an underutilisation rate estimate which is the sum of the unemployment and underemployment rates. The underemployment rate, as reported by the ABS was 6.6% in February. Adding it onto the 4% unemployment rate, we get an underutilisation rate of 10.6%. While the unemployment rate is at a rate last seen before the financial crisis, the underemployment rate, and hence the underutilisation rate, are still significantly higher than they were back then, particularly for Queensland. Possibly the media and commentators pay too much attention to the unemployment rate figure and should discuss underemployment as well. The underemployment data are available, so there’s no reason to think the labour force data are being manipulated or something is being covered up.   

Another criticism of the unemployment data I’ve heard relates to the discrepancy between the ABS’s unemployed persons estimate (i.e. 563k people in February) and the number of people on JobSeeker payment (i.e. 868k people in February). The difference between them comes from the fact you can receive JobSeeker but not be currently available to work, so you wouldn’t be classified as unemployed according to the ABS’s definition. For instance, you could be sick or injured and receive JobSeeker, but not be counted as unemployed by the ABS. Is this misleading? I don’t think so, but I would like to have a closer look at the composition of people on JobSeeker to make sure I really understand the source of the discrepancy, and I’ll aim to do that in a future post. 

The March labour force figures will be published tomorrow (Thursday 14 April) and we’ll see whether the unemployment rate will fall below 4% and end up at a rate not seen since the early seventies. Certainly there is extraordinary momentum in the economy and along with super-high commodity prices, that will have a big positive impact on upcoming state budgets, as I’ve attempted to estimate in a recent report:

Nearly $30 Billion of Potential Upside for State Budgets in 2021-22 and 2022-23

Highly relevant to Queensland’s state budget, coal prices have been going crazy and the market is expecting them to remain high for the next year or so, based on futures pricing (see chart below). That represents a big injection of money for Queensland Treasury. Sure, the state government faces an expensive clean up bill for the floods, but the federal government will cover the bulk of the cost, and the economy is performing better than expected, which will boost payroll tax revenue. Consider that Queensland’s unemployment rate was 4.3% in February, while the mid-year budget update forecast an average rate of 5.25% in 2021-22 and 5% in 2022-23. In Queensland and the rest of Australia, state budgets are looking stronger.

N.B. 1st position refers to one-month ahead futures prices and 12th position refers to 12-months ahead prices (i.e. currently for March 2023 delivery). 

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Will the Brisbane Olympics stack up? The Federal Parliamentary Library investigates

The latest federal budget refers to “$22.5 million for the Brisbane Olympic and Paralympic Games 2032 – Business Case Development”. It’s a shame that we didn’t spend some of that money prior to deciding to bid for the Games, to determine whether it would be worthwhile to host them. Consider that a new Australian Parliamentary Library Research Paper, authored incidentally by a past QEW contributor Rod Bogaards, raises big questions about the desirability of hosting the Olympics. Here’s one of the key points in the paper:

…there is considerable uncertainty as to whether the benefits of the Brisbane Olympics in 2032 will outweigh the costs to the community, even with the ‘New Norm’ changes. This suggests the need for any prospective host government to undertake a careful assessment of costs, benefits and risks before committing to host the Olympic Games.

We know that a careful assessment of costs, benefits, and risks wasn’t done for the Brisbane Olympics prior to bidding, something I noted in a previous QEW post which Rod cited in his paper (on p.21).

Of course, we won the Games, and I don’t want to continue to be a killjoy, but I remain concerned that as a strictly economic proposition the Olympics doesn’t stack up. I suspect we’d be far better off taking a fraction of the money we’ll spend on the Olympics and funding upgrades of local sporting clubs and school sports facilities instead. In my view, you have to place a very large value on its potential boost to national pride, and engage in arguably wishful thinking regarding the long-term tourism impact, to convince yourself that the Olympics makes sense to host. Let’s cheer on the Green and Gold team at the Olympics for sure, but why not let some other host city with gullible decision makers pay the bill?

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

Posted in Queensland Government | Tagged , , , , | 1 Comment

Concorde’s lesson for gov’t industry promotion efforts

Interventionist industry policies by governments, such as the Queensland Government’s current hydrogen industry strategy, are usually viewed sceptically by economists, because they often deliver poor value for money for taxpayers and don’t have logical rationales. One notorious example from history is the Concorde, which was an incredible technical achievement and a beautiful airplane, but cost the British and French governments 11 billion pounds (as calculated by the Economist in 2003, so it would be more now due to inflation), and the end result was an aircraft that ultimately proved uneconomic to operate. I tell the story of Concorde in my latest Economics Explored podcast episode.

You can listen to the conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps. 

Show notes and a transcript of the episode are available at:

Concorde’s economic lessons: a closer look – EP131

British Airways Concorde Aircraft, sometime in the 1976-2003 period when they were in service.

In my view, one of the main lessons from the Concorde experience is governments should avoid interventionist industry policies. Instead, they should focus on delivering essential services and setting competitive tax and regulatory policy settings.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

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Qld Gov’t $3k EV subsidy looks like poor value for money for taxpayers

As far as I can tell, the Queensland Government hasn’t released any economic analysis of its $3,000 electric vehicle (EV) subsidy, probably because, if it did, the analysis would reveal the subsidy was a poor use of public funds. Some back-of-the-envelope calculations can illustrate this.

First, let’s work out the reduction in greenhouse gas (GHG) emissions associated with an EV. According to PwC, in its 2018 Recharging the Economy report on p. 18: 

An average new ICE [internal combustion engine] vehicle emits roughly 185 gCO2/km compared to average new EVs which emit 98 gCO2/km if charged via the electricity grid. When charged via renewable energy sources, EVs emit zero emissions. As renewable energy represents an increased proportion of the electricity mix and battery capacity improves, EV emissions are estimated to fall to 58 gCO2/km.

Now, according to the ABS’s Survey of Motor Vehicle Use, the average distance travelled per year by passenger vehicles is 11,100km. Using this estimate, and the average CO2 emission estimates reported by PwC for ICE vehicles and EVs, it can be calculated that each new EV should result in a reduction of GHG/C02 emissions of 1.0-1.4 tonnes per annum. 

Let’s be generous and say each EV has a life expectancy of 20 years, which would mean 20-28 tonnes of GHG emissions avoided over its lifetime. If every household receiving the $3,000 EV subsidy would not otherwise have purchased an EV, that would mean the Government would effectively pay $107-150/tonne for GHG abatement. But I expect a lot of people who end up getting the subsidy would probably purchase an EV anyway. If we assume half of the EVs subsidised would have been purchased anyway, then the Government would effectively be paying $214-300/tonne for GHG abatement. This would be very poor value for money. Consider the following: 

  • The Centre for International Economics (CiE) has estimated Australia’s cost of GHG abatement at around $40-50/tonne (see p. 49 of the CiE report What existing economic studies say about Australia’s cost of abatement);
  • Australian Carbon Credit Units (for a tonne of GHG abatement) are trading at $31, according to the Renewable Energy Hub, and hence it would be cheaper for the state government to buy carbon offsets instead of subsidising EVs for a given level of emissions reduction; and
  • the social cost of GHG emissions is unlikely to be much higher than $100/tonne (e.g. see this Brookings note The social cost of carbon which refers to a 51 USD/tonne estimate), and hence governments should be unwilling to spend any more than $100/tonne to reduce GHG emissions. 

All these figures suggest that the Queensland Government will pay far too much to abate GHG emissions with its EV subsidy. There would very likely be much more cost-effective emission-reduction measures it could support, and much better uses for the $45 million this subsidy will cost the budget.

I’m not criticising EVs, which are certainly the way of the future. I’m criticising the state government’s $3,000 subsidy. It look likes a high-cost way to achieve additional GHG emission reductions – i.e. reductions beyond those which would occur anyway as people naturally switch to EVs over time.

I’d really like to see the Queensland Government’s analysis of the cost-effectiveness of its EV subsidy, although I suspect it didn’t prepare one, because it probably guessed the analysis wouldn’t look good, or it doesn’t care about the cost-effectiveness of its policy measures, only their political attractiveness.  

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week.

Posted in Budget, Environment | Tagged , , , , , , , | 4 Comments