Thursday, February 17, 2011

It's a small levy, but a daft idea - McKibbin

So daft is the proposed $1.8 billion flood levy that if we kept doing such things we would end up a banana republic, a prominent economist has told a parliamentary inquiry.

Professor Warwick McKibbin is a internationally recognised economic modeler and a member of the Reserve Bank board.

He told yesterday's inquiry he was speaking in a personal capacity and not on behalf of the Bank.

While the amount of money to be raised was small, the principles would guide future bigger decisions, he said.

Most economists agreed borrowing was better than taxing to fund recovery from disasters.

"The analogy is the case of a person whose house is damaged after a storm. It does not make sense to stop eating until enough is saved to rebuild. A better strategy is to borrow to rebuild and to reduce consumption a little each year to pay for it."

The levy would be expensive, eating up perhaps 10 per cent of the amount raised in collection costs including "the reprinting of forms, literature and perhaps legal actions over who pays it"...

Although designed to apply only to incomes over $50,000 and to people not affected by the floods there was room for dispute over who would pay the levy and who would not.

And there was a danger the levy could also make Australians less generous in future crises, causing Australians who had dug deep before being hit to think twice about donating again.

By contrast borrowing to fund reconstruction would be welcomed by financial markets and could enhance economic credibility. The stumbling block problem was the deficit straitjacket imposed by both sides of politics.

Asked whether this mattered given that the levy was so tiny Professor McKibbin said it was important to "establish the principles because when the big decisions have to be made we will have a framework in which to act".

"If we continue to do what we have always done without considering the principles we end up becoming a banana republic," he said. "We have to be very careful that all decisions, even the small ones, are done in the appropriate way."

Asked later by The Age whether his criticisms would extend to other proposed levies for purposes such as national disability insurance Professor McKibbin replied they would not.

"I was speaking only about levies used to fund recoveries from disasters. One of the key things a government can do well is bundle the risk of a whole bunch of people and make it cheaper for everybody. If well structured, a national disability insurance levy could work well."

Professor McKibbin was supported by economist Saul Eslake of the Grattan Institute who said the decision to raise money by a levy rather than borrowing was "political" rather than economic. Borrowing would have had "no adverse implications".

"The Queensland government is taking on an extra $4.8 billion in debt as a result of the floods. No-one is suggesting, and nor should they, that is going to put upward pressure on interest rates," he said.

Asked to explain why the government had decided on a levy rather than borrowing, acting Treasury Secretary Nigel Ray said it was concerned about "fiscal discipline" but agreed the amount involved was "small".

The inquiry will report Monday. Independent Tony Windor has said he "leaning against" the levy and will be guided by the report.

Published in today's SMH and Age

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