The flood levy debate: pointless partisan politics

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by David Donovan

The flood levy issue is perhaps the most pointless and perverse political debate seen in Australia in recent times, says David Donovan.

There have been acres of newsprint, days of television and radio, hundreds of MP door-stops and days of parliamentary debate devoted to the $1.8B flood levy—and all for what? Whichever way you look at this issue, it's a non-event. Indeed, listening to the lacklustre debate in Parliament yesterday, carried out mainly by political also-rans, you feel that both sides are just going through the motions; their hearts just aren't in it.

And why would they be?

The waste of the Parliament’s time pursuing this issue and the pointless politicking in the media from both sides is another example of why our partisan political system is so deeply flawed. The public interest is simply not being served by our politicians, who could be using their time constructively to engage in the pressing issues that actually do face our country at this time—and there are plenty of them.

Why do I say the levy debate is unnecessary?

Well, firstly, because the levy itself is entirely superfluous and any money for natural disaster reconstruction should be raised by a relatively small increase in public debt. However, given the Government has oddly decided to use the levy mechanism, and since the impact on the economy and taxpayers will be so negligible, there is also no pressing economic reason for the Opposition to oppose it.

The whole debate is pointless and driven by the politics of spin, not the good of the country, the economy, or we bemused and increasingly bewildered taxpayers.

The flood levy: a waste of time and effort

Let’s examine in more detail why I say the levy is completely unnecessary.

The $1.8 billion raised by the levy is about 0.5% of the total Government budget of about $340B (using the 2010-11 budget forward estimates). Given the Government already owes $95B, adding $1.8B does not markedly alter our overall debt-equity ratio or economic position. And, given Australia has come through the economic crisis without dipping into a recession – something virtually no other industrialised economy can claim – and with a lower public debt to GDP ratio than virtually any other developed nation (note graph below), it makes sense for us to borrow this fairly insignificant amount of money (for a nation) and pay it back at our leisure, as we will with the rest of our sovereign debt.

The Australian late last month.
"The federal government should end its “fetish” with avoiding budget deficits and borrow to pay for flood damage rather than impose a one-time levy on taxpayers….Borrowing is a far better strategy.

"This is a classic example of where a government should borrow. We have room to run deficits in the short term when needed for these sorts of disasters. The philosophy should be that you pay for it in the most efficient way possible…You spread it over many future years and so the cost per person is far less and the politics become [sic] more diluted.”

Professor McKibbin went on to tell The Age last week:
"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."

It was reported in the same Peter Martin article that:
Most economists agreed borrowing was better than taxing to fund recovery from disasters.

Labor’s levy: political cowardice and spin

So, why has Labor decided to go to the trouble to add a levy when they could simply extend slightly the national overdraft with no pain to anyone? Why continue this endless silly debate and impose a whole new administrative burden on the ATO and taxpayers when they could just call up UBS and Credit Suisse and get the money here next week?

The answer comes in two parts, neither of which involve doing the right thing for the nation, but instead come down to politics and spin.

[caption id="attachment_4415" align="alignright" width="300"] Howard Government treasurer Peter Costello

Firstly, Labor is spooked by their reputation as the party of deficit. The mantra of the Howard/Costello years about “paying back the debt” of the Hawke/Keating years has been terribly efficient at painting the Labor Party as the party of reckless spending and excess.

Of course, this is nonsense, the debt in those years came about largely because of economic downturns like the one we have just experienced. The Labor debt was paid off by the Howard Government through a boom economy and the privatization of profitable Government assets such as Telstra and Qantas. In effect, the Coalition merely converted public debt into private. Indeed, rather than any claim to fiscal rectitude, Howard continued almost all the Keating programmes and, indeed, rather recklessly squandered the economic good times not on better national infrastructure or improvements to health funding, but on an unseemly middle-class vote buying spendathon, such as the non-means-tested baby bonus and first home-buyer scheme.

In any case, the strategy of branding Labor as poor economic managers has, of course, continued under Abbott – with the Murdoch media as willing publicists – by painting the necessary and timely economic stimulus by the Rudd/Gillard Government – through such schemes as the BER and home insulation – as wasteful extravagance. Of course, as the Coalition well knows, this timely intervention saved the Australian economy from dipping into recession and though there were obviously problems and waste in both programmes, this was simply because the money needed to be shovelled out the door as quickly as possible to stimulate the economy when it needed it—before the fire went out in the engine-room of economic growth.

If the Government had waited while programmes were patiently constructed at the usual glacial pace of Government, the Australian economy is very likely to have withered on the vine and we would have seen recession and widespread unemployment, rather than a single-quarter downturn. It may have been enough to see the housing bubble-burst – rather than slowly deflate as it has – which would have surely caused devastation to our economy similar to that seen in the United States.

Yes, there was waste and inefficiency in these programmes, but it was a matter of the ends justifying the means. So, the Government should be applauded for its economic management, steering the economy through treacherous economic waters, but you won’t see any praise in Australian politics, or co-operation—it’s vitriol or nothing.

On the other hand, if the Government was better at arguing its case, it would be able to stand up for itself, defend its record – as well as point to the hypocrisy of the Coalition – and rationally put the case for a small additional increase in public debt to reconstruct Queensland. And, if they communicated effectively, the public would see and gladly accept the rationale for further borrowing. After all, we won't be getting slugged with an extra tax, no matter how trivial it may be—that's bound to be popular, isn't it?

But no, the Labor Government feels obliged to show that it too is “fiscally conservative” – the new catch-phrase – so that getting the budget back into surplus by 2013 has to be its “first priority”. The reason for this is that there will be an election in 2014, if the balance of power holds, and Gillard wants to trumpet in the campaign that she has “repaid the debt”, negating a potential weakness that would definitely be exploited by the Opposition with their usual specious rhetoric.

Of course, what the Government doesn't seem to have realized is that the economy is a very volatile beast. Unless you have a reliable crystal ball and know how to use it, it is tricky to predict the future. As a former finance analyst, I can attest to the fact that financial forecasts very seldom closely reflect the eventual reality. For instance, it would merely take a major downturn in key commodity prices, or a double-dip recession in the US and Europe (as seems likely) and then there will be nothing in the world that Wayne Swan can do to restore the lost $10’s of billions that would inevitably leak from the revenue side of the Australian budget. In effect, Labor is at the casino and have bet their political future on the economy staying rosy for the next few years. For all our sakes, let’s hope they’re right.

The second, and probably main, reason that Labor have decided to lumber Australians with an additional tax is because they have seen the outpouring of public sympathy and donations for flood victims. They certainly would have private polling and focus group research from Essential Research or UMR reporting to them that most people, feeling solidarity with the victims, actually want to make an extra contribution to the reconstruction. Indeed, public opinion polls have shown that the majority of people support the flood levy, which the Government has now cunningly described as a “mateship levy”.

Of course, this merely shows the good-heartedness of the Australian people, and possibly their widespread ignorance about taxation and consolidated revenue. Whether the money comes through a levy, through savings or through borrowing, the Australian people will be paying the money back one way or another, predominately through already existing taxes. Income tax is an already existing and – like the flood levy – progressive measure designed to tax people according to their means.

The imposition of this levy by the Gillard Government has come about merely because of spin and politics, with a bitter dash of political cowardice thrown in for good measure.

The Coalition: playing the game of conquer and destroy

So, knowing that the levy is unnecessary, the Coalition should try to stop the additional impost on the Australian taxpayer, right?

Wrong. As I’ve pointed out the Coalition are also playing games over the issue and trying to push the Government into a political corner. If they had the best interests of the nation at heart, they would simply suggest that the Government borrow the extra funds. But instead, the Coalition are suggesting the Government further slash and burn the budget by deferring or cancelling vital Government programmes, including overseas educational aid to Indonesia—something that has been designed to combat Islamic terrorism and which has now divided the Liberal Party. Even with the levy, the Government plans to scrap several climate control measures as well as cut rent assistance for the disadvantaged. There is no need for any of this, given the expected flood damage bill is only $5.6B in total—still a relatively modest sum for a $1.1 trillion economy.

The Coalition are taking this course to support their brand, because they have presented themselves since the Howard years as the party of low public debt. "Paying back the debt" was, of course, part of their annoying mantra during the 2010 election campaign. The Australian people seem to have been gradually brainwashed by Howard and Costello into believing public debt is terrible but private debt and rampant consumption is perfectly fine. That the public still accept this ridiculous proposition today is surprising since unsustainable levels of private debt are one of the major factors that led to the economic meltdown stemming from the US housing crisis. People couldn't pay their mortgages because they had unsustainable levels of private debt and this caused a domino effect throughout the world economy that brought the banking system close to total collapse. Of course, good and honest communicators in the Government should be able to educate the people about this reality, but unfortunately those sort of personnel are few and far between in this Government.

The Opposition also stands condemned for wasting the Parliament’s time objecting to the levy. Though it is clearly unnecessary, in the overall scheme of things the amount raised is such a trivial amount as a propertion of our national economy, and adds such a negligible additional burden on the Australian taxpayer, that they should simply note their strong objection and allow the legislation to pass. This would mean that there would be more time in Parliament to debate other important matters of state—global warming, immigration, education, broadband, health, defence, maybe even the republic. There are other issues of importance facing us rather than how the Government chooses to fund essential reconstruction.

But no, for cynical political reasons the Coalition will continue to object to and bluster about this miniscule levy because they want to try to bring the Government down, not because they care about its effect on the national economy. This is no different to the Government, who wants to bring in the levy merely so they want to be seen in a certain light, not a different light, so they can win the next election.

It is all so petty, all so juvenile, all so political, and also not in the interests of Australia. Our public policy is determined by who will get the best headlines in the next news cycle, who can record the best grab, who wins next Tuesday’s Newspoll, and not at all about what is the best course for the nation as a whole.

If this is our political system, it’s broken and we – the voters – are being taken for a ride.  
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