Ad hockery

by ericknight

Hockey is right. The problem with the flood levy is that it is ad hoc.

Let’s start with what is good about the levy. It is good that we are helping Queensland in their time of need. (The State of Origin has not yet crushed our soul). It’s good that the economy is good enough that we can raise A$ 5.7 billion without too much sweat . And it is good that the money will be spent on infrastructure and essential services.

The problem with the proposal is with the way these things will be achieved.┬áLevies are not economists’ favourite tools. The reason is simple. A stable economy is one where all participants have a clear vision of what the future holds. The difference between a levy and a tax is that a tax is permament and a levy is fickle. The Medicare Levy is called a levy but it is really a tax.

Levies create apprehensiveness about the future. That’s a great recipe if you’re writing a thriller but it is not the best way to manage national finances. Admittedly the flood levy is small but it’s not the sort of precedent you want to be setting. It would be much more stablising to pay for the floods out of the national budget and delay the date by which it comes into surplus.

Why then the levy? Well, it’s politics I suppose. Gillard and Swan have committed to bring the budget to surplus just in time for the next election. Break that promise and their image of economic credibility is diminished. The irony is that they have attracted a lot more attention doing it this way than if they had kept their faith in voters’ common sense.

{ 1 comment… read it below or add one }

Sam February 27, 2011 at 6:20 pm

Both you and Joe Hockey make a good point. Ad hoc levies like this can only create uncertainty and apprehensiveness about what may happen in the future. They also have other problems.

Levies like this suggest a deeper flaw in the government’s broader strategy for managing public finances. They’re committed to a balanced budget by the next election, and tell us this is how we should assess their economic credentials. However, the fiscal deficit remains tiny compared to most other nations in the developed world. Economists also remain divided over the need to maintain a balanced budget. Arguments against include that productive investments today may generate a return to the nation higher than the government’s borrowing cost. A bit of government debt shouldn’t be a problem.

If they really must balance the budget, levies like this also suggest a worrying appetite for short-term fixes. Despite sitting on a major review of the tax system, filled with intelligent, reasonable and far-sighted changes, a flood levy is what we’re given. Perhaps a little more focus on taxing resource rents and replacing some of the inefficiencies in the current system would be the way to go.

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