Wednesday, January 26, 2011

Might this be the wrong time for a levy?

Hands up everyone who knows the difference between a good levy and a bad levy. Hands down Wayne.

The Treasurer is softening us up for a levy to fund the cost of rebuilding after the floods. He thinks its a great idea because it has been tried before and worked. Prime Minister Gillard is expected to announce it tomorrow.

Over the weekend Swan outlined its impressive lineage.

"We've seen levies used in the past to fund programs such as the gun buyback scheme, worker entitlements after the collapse of Ansett Airlines, and assistance packages for the dairy and sugar industries," he said. "It is just common sense to keep all the options on the table as we consider how the Commonwealth Government will help to rebuild Queensland, and how we will fund that."

But what was common sense in paying for the buyback of firearms, assisting with the collapse of Ansett, funding the commitment to East Timor and compensating farmers is far from common sense when it comes to rebuilding after the floods. It could actually be dangerous.

Don't get me wrong - I like the idea of levies. When voters such as myself were metaphorically screaming at the Howard government in 1999 to do something to help the people of East Timor it was only right that we were presented with a bill... What we wanted cost one billion. Howard was to get it by saddling those of us on middle to high incomes with an extra Medicare levy for a year. (He later decided not to, but it was still a good idea.)

The guns buyback levy was a corker of an idea. The nation asked for it, the nation needed it and the nation was prepared to pay.

The 11 cents per litre milk levy, now ended, was so successful it bought us lower milk prices while it was in place (and much lower since) such was the fierce deregulation it ushered in.

So how is a levy to fund the costs imposed by the floods different?

Wayne Swan can't see a difference. He told a press conference yesterday the costs imposed by the floods would be enormous, and "the fact is, the money has to come from somewhere".

"I don't think the Australian people would want us to respond by hacking into health and education, sacking teachers or nurses," he said, setting up a straw man.

The alternative of pushing out the budget's projected return to surplus in 2012 was unthinkable.

"The Commonwealth made it very clear when we acted to protect our economy from global recession that when growth returned above trend we would move our budget quickly back to surplus, not because it is some vauge objective, but because it is the responsible thing to do."

Responsible no matter what?

Apparently so.

On the Sunrise program during the August election Swan promised the Seven network's David Koch, "we’re getting back into surplus in three years, Kochie."

Koch probed, "Come hell or high water?"

Swan replied, "Come hell or high water, but we’ve got the judgement to handle these situations."

Judgement is needed because hell and high water are quite different to decisions to buy back guns or pay off farmers for deregulation.

They knock the stuffing out of the economy. When the economy is winded it is wise not to whack it further.

The Treasurer knows about the impact. He said yesterday it would be "unprecedented in economic terms". The resulting price increases alone would be "pretty tough on the family budget"

Sunday he told us the economic toll of the floods would surpass that of tragedies such as the Victorian bushfires and Cyclone Tracy.

Queensland makes up 19 per cent of the nation's production, 80 per cent of our coking coal which is itself responsible for 2 per cent of GDP.

Westpac expects economic growth to turn negative - yes, negative - in the March quarter. It has slashed its forecast from growth of plus 1.1 per cent to minus 0.1 per cent.

Consumers are withdrawing into their shells. This month the proportion feeling good about conditions over the next 12 months dropped 16 per cent.

Woolworths is bemoaning a "new frugalism" and says spending on discretionary goods will be hit as people struggle to afford flood-hit basics.

It's the wrong time to hit consumers further.

Coles knows this. From today it is cutting the price of its milk one cent per litre in an effort to entice customers into its stores.

Wayne Swan should know it too. The whole point of economic management is to soak businesses and consumers when times are good and to tighten up or hand money out when times turn down.

Professor Warwick McKibbin has been doing it for ten years on the Reserve Bank board.

Last week he likened the economic impact of the floods to that of an earthquake, one he has run the numbers on.

"When Japan's Kobe earthquake struck the wrong response was to tighten government spending," he said. "What was needed was more spending to support demand and confidence."

"Sure it's important not to have too much debt," he told The Age. "But the idea that you have to have a particular surplus at a particular point in time no matter what, is dangerous."

Swan and Gillard are about to lead us down a dangerous path.

There will be plenty of time to impose a levy or to slash spending when the economy is on the mend.

To do it now, as the economic shockwave of the flood is about to hit, betrays enormous insecurity. They must know it matters scarcely at all to government finances whether the budget hits surplus in 2012, 2015 or 2011.

But it could matter enormously to economic management. We hired Swan and Gillard to manage the economy. They did it well (with Rudd and Tanner) during the crisis. It would be nice if they did it well after the flood.

Published in today's SMH and Age


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7 comments:

Anonymous said...

Maybe they should stop wasting money on the National Broadband Network. This return to surplus deadline is reckless and politically motivated. Good article Peter.

green idea said...

Govt could save $5B/yr by making negative gearing only available for new constuction or purchase of IPO shares. Better to reduce one major long-standing tax rort than introduce a new levy.

Anonymous said...

um, isn't this why we pay taxes already. if you cut out the labour waste and backhanders then there should be ample for this?

Marek said...

So 5 months from now we are going to have to starts paying an extra $5 a week tax that will be all spent(plus more) on new construction and repair. And this is going to destroy the economy? Really?

Peter Martin said...

You are in possession of details I do not yet have.

It is is small, and comes in after the recovery it could be alright.

And getting rid of cash for clunkers would be a good idea at any time.

Marek said...

agreed about the cash for clunkers

reports going around are a 0.5% increase to the medicare levy starting from july 1st. On the average salary that about $5 per week

Peter Martin said...

We are about to find out

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