why I think the flood levy is a dumb idea

Today’s column in the SMH:

The "remote head". Also a dumb idea.

Joe Hockey is right. This flood levy is a dumb idea. And I suspect even Julia Gillard knows it.

Asked at the end of her National Press Club address whether she was prepare to extend the levy if rebuilding proved more expensive than the $5.6 billion anticipated, Gillard’s answer was curt: ”The money will come from cuts somewhere else.”

Even the modest size of this levy, raising just $1.8 billion and applying only to people with taxable incomes above $50,000, hints at a degree of hesitancy. More than two-thirds of the federal government’s share of the cost of rebuilding will be met instead by spending cuts and deferrals.

Announcing the plan yesterday, Gillard argued ”we should not put off to tomorrow what we are able to do today”. It was the ”soft option” to borrow to build infrastructure, she said, revealing an obsession with balancing the books that would make Peter Costello jealous.

It is now clear the Gillard government is suffering a crisis of confidence in its economic management skills. Haunted by accusations of wasteful spending and brow-beaten by the debt-and-deficit scaremongers, Labor has chosen to pander to the scare campaign of its opponent and in the process risk becoming what it fears the most: a poor economic manager.

A more confident economic manager would have started yesterday by pointing out that Australian government debt is among the lowest of the advanced world. Rebuilding costs, while at first glance sizeable at $5.6 billion over four years, are minuscule compared with total projected revenue over those four years of $1.4 trillion (about $350 billion a year). Just so we’re clear, that’s 0.4 per cent of total revenue over four years.

Gillard could have called for calm, acknowledged the floods were a game-changer for her projected surplus in 2012-13 and admitted that only time would tell exactly which side of the line the budget balance would fall on in two years.

Instead, Gillard and company cling possessively to their straw man of getting the budget back into slim surplus. I hope it provides them some comfort, because it gives me none.

Instead of having a sensible conversation with the people about how budgets work, Gillard opted for a sop to the deficit hawks. As a sacrifice to the surplus god, she proposes to whack a new tax on households – the weakest part of Australia’s two-speed economy. Perhaps she has decided middle to high income earners are a softer touch than those troublesome, if fantastically profitable, mining companies.

The truth is it could very well prove the case that a degree of tightening of government finances is prudent to offset the stimulatory impact of rebuilding. While the floods shrink production in the short term, in the medium term rebuilding stimulates activity. In an economy close to full capacity, any new government spending will compete with private investors – that is mining companies – for workers and resources, potentially bidding up prices.

So it might make sense to start pulling on the fiscal reins. In reality it seems just too early to tell barely two weeks out from disaster. But, even if such ”fiscal tightening” is appropriate, there are three main problems with choosing a household levy to pay for the rebuilding.

First, this time is fundamentally different from previous levies that were designed to address one-off events, such as the collapse of Ansett or the Howard government’s gun-buyback scheme.

If the Gillard government believes its own rhetoric about climate change it should expect the natural disasters like the floods in Queensland and Victoria and the Black Saturday bushfires will be an increasingly common feature of Australian life. The Finance Minister, Penny Wong, a former climate change minister, should have plenty insight.

So what will Gillard do if next summer brings yet more flooding and fire? Whack on another levy? And another?

A second problem with choosing a household levy, and targeting high-income earners, is that it will make them less likely to donate not just for this but potentially for all future natural disasters. How likely are you to donate to the next flood relief drive if you suspect you’re going to be hit up for part of the cost anyway?

The third argument against a levy is that there were simply better options for cutting government spending. The $3.6 billion in spending cuts outlined yesterday were all cuts to dud Labor-era programs, such as the cash-for-clunkers program. Labor is still to make any deep inroads into dud programs from the Howard era.

Instead, middle-income families continue to receive generous welfare payments, defence spending continues to grow, first home owners continue to receive grants that only push up house prices, owners of company cars continue to drive thousands of kilometres just to qualify for a tax loophole.

All the while, Gillard speaks of ”reprofiling” and ”resequencing”.

It’s lazy. It is symptomatic of a weak-willed government, not prepared to make the hard cuts that would make a lasting difference.

As for Hockey’s suggestion to axe the national broadband network, there is simply not enough known about the costs and benefits of the project for a meaningful assessment.

Labor proved itself particularly adept at spending taxpayer money to sandbag against the global financial crisis. But that is the easy part. Cutting government spending in the good times, to avoid putting extra pressure on demand, is much harder. Are these guys up to the job?

More deeply, Labor has allowed the Coalition to define the parameters of the economic debate. And in that it has all but admitted intellectual defeat.

The Treasurer, Wayne Swan, set the standard high in his 2005 book Postcode: The Splintering of a Nation, in which he wrote: ”In emphasising sound economic management, we must never follow our opponents into the trap of turning politics into a mere exercise in accountancy.”

How easily we forget.

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4 Responses to why I think the flood levy is a dumb idea

  1. NateA says:

    Jessica,

    Good luck with the new blog, I look forward to another year of your articles, you’re helping me through my Economics course 😉

    Today’s SMH article was a cracker, I think they’d be a bit concerned with the reaction this has stirred up. I think people were happy to donate, but the double hit of a tax as well, when budgets are stretched, is too much for people on 50-100k incomes, especially if you have a mortgage in this city.

    Sydney house prices are the world’s most boring conversation, but I look forward to you weighing in (sorry, bad choice of words), having your say on that topic. Governments throwing money at the Qld disaster has to be a big worry for the inflation outlook, and interest rates, doesn’t it?

    Good luck with the fitness regime (to both of us)

    Nate

  2. econogirl says:

    Hi Nate,

    Thanks for the comment, glad you enjoyed the column.

    Of course the point of the levy and spending cuts announced by the government this week is to draw demand out of the economy to offset the added stimulus from the rebuilding. That’s all aimed at keeping pressure off the RBA to step in and cool private demand with interest rate rises. We’ll see how that pans out!

    Cheers, Jess

  3. senexx says:

    As I said from my economics account on twitter the other day when the article first came out:

    Excellent Column today.

    Unlike the previous blog post I wholeheartedly agree with you on this one.

  4. Vestan Pance says:

    I found the quotes from Julia Gillard in this article particularly telling.

    It just shows how little politicians know about how our monetarysystem actually operates. Very, very worrying.

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