Why Gillard’s flood tax is an attempted political con job: Bartholomeusz

Julia Gillard’s not-so-great but not-so-big new tax announced is an attempted con job, another piece of political spin. To put the economic significance of the $1.8 billion that will be raised by the “one-off” levy in perspective, it represents less than 0.5% of the Government’s $362 billion of budgeted spending for this year.

Indeed the entire $5.6 billion Gillard says is the expected cost of the Commonwealth contribution to rebuilding flood-affected regions represents only about 1.5% of its expenditures. In other words, in the context of the Government’s spending, it is small change and certainly not material enough to warrant imposing a levy/new tax on taxpayers.

The decision to introduce the levy has been driven purely by the Government’s obsession (and the Opposition’s), for political reasons, with being able to continue to claim it will return the budget to surplus by 2012-13.

It has been able to find $3.8 billion of savings fairly easily, by redirecting or delaying about $1 billion of previously planned infrastructure spending and by shelving a number of carbon abatement programs including the much-derided $600 million “clash for clunkers” scheme.

The carbon abatement measures are no longer needed, says Gillard, because of her “determination to deliver” the carbon price she promised not to introduce at the last election.

While a return to surplus as soon as practicable is a worthy aspiration, it isn’t of any consequence whether the budget has a modest surplus or modest deficit in 2012-13.

It certainly isn’t an objective that has to be met regardless of the economic or social circumstances and no one (other than perhaps the Opposition) would have protested if the projected surplus was $1.8 billion less, or even if the entire $5.6 billion had been added to spending to produce a $2.5 billion deficit in 2012-13.

The ease with which the government was able to identify the $3.8 billion of savings, however, does suggest it could have financed the extra $1.8 billion by simply trimming or deferring a few more programs – by slowing the roll out of the national broadband network, for instance.

The unwillingness to shift the timeline on a return to surplus regardless of the economic context is potentially quite dangerous, given the complexity of economic developments. Fiscal policy has been placed in a straitjacket by the politics of the commitment to the surplus just as the economic picture has become quite clouded.

On the one hand a resources boom and an associated avalanche of investment are creating a massive income shock. With an economy operating near capacity, and with a shortage of the skilled workers and engineers the investment will require, the resources boom has the potential to spark a wages spiral.

Then, of course, there’s the $40 billion-plus NBN roll-out, which will also require a small army of skilled trades people, and now the re-building of Queensland and parts of Victoria, which will require the same. Even with Gillard’s fast-tracking of approvals for temporary skilled migrants to work on the rebuilding of Queensland, there’s going to be massive and potentially destabilising competition for skilled workers and for equipment.

But most of the resource-related activity is occurring in the two resource-rich states, Queensland and Western Australia. While in the near-term the floods will wipe half a percentage point or so from national GDP, the rebuilding in Queensland and the resource sector investment in Queensland and WA will underwrite a surge in economic activity in those states.

People living in NSW and Victoria, however, aren’t going to gain much direct benefit from all that activity and, with the rest of the country, are already suffering from the Reserve Bank’s pre-emptive strike against the inflation it fears the activity will kindle.

The recent results of big retailers have tended to confirm the anecdotal evidence that consumers’ confidence and willingness to spend has been battered by last year’s rate rise. Rising energy prices, the likely spikes in food prices as a result of the floods and continuing concern that the RBA will move again this year are going to continue to weigh heavily on households.

In Queensland in the near- to medium-term, and in some parts of Victoria, of course, there is another whole layer of reasons for households and businesses to be depressed and nervous.

And now the Government proposes to impose a completely unnecessary tax on middle and higher income earners for purely political purposes. The amounts involved might not be particularly significant in the context of the Federal Budget and the $41.5 billion deficit forecast for this year but the impact on the already fragile consumer sentiment and the wider economy could be quite material, and quite unpleasant.

This article first appeared on Business Spectator.