Isn’t it all about timing?

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The whole flood levy debate really is strange. The government want to keep the deficit from growing. The opposition want that too but suggest moving around spending is better than something that will put a drain on the economy.

Here is the thing. Surely it is all about the timing. On the deficit issue we are interested in the long-run deficit and so we want that to balance out in the future. On the stimulus issue, we are interested in the short-term consequences and so we want to avoid drains now. A levy and a quickly enacted reshuffling of government spending are both likely to cause some drain on the economy on the short-run. So let’s not do that. Let’s commit to a levy coming in later and phased unless of course it turns out we don’t need it because we have sensibly reshuffled spending.

The point here is both parties appear focussed on short-run actions on fiscal balance where the only short-run actions we should be concerned about is marshalling resources for Queensland and other flood ravaged areas.

12 Responses to "Isn’t it all about timing?"
  1. Fiscal policy is one area where even governments are incapable of thinking clearly.  This is long-lived infrastructure we’re talking about – it OUGHT to be funded by debt (in fact it is generationally unfair, as well as inefficient, for it to be paid from current taxes).

  2. Like it or not – most decisions are going to be mostly around election cycles.
    If the short term pain is high then the long term gain is irrelevant to a politician.  You’re an economist: what is their incentive to act differently?
    Good argument for fixed 4 year terms in my opinion.
     

  3. I am not sure this is true. I think you will find that the government are receiving advice from the Treasury that the floods are a negative supply shock that have reduced the productive capacity of the economy. With there already being little spare capacity prior to the floods (hence the RBA’s tightening cycle with the prospect of more to come), the government are concerned that debt financed reconstruction (especially if the first round effects boost demand more than supply) will increase the output gap and invite the RBA to tighten policy. I don’t necessarily agree with that perspective, but I’m fairly confident that is the macroeconomic advice background underpinning the government’s desire to fund the reconstruction without raising the deficit.

  4. “A levy and a quickly enacted reshuffling of government spending are both likely to cause some drain on the economy on the short-run. So let’s not do that.”
    But spending $5bn+ on rebuilding Qld will be stimulatory even if it is investment in infrastructure. Net effect roughly neutral = a good thing when unemployment is 5%? Seems like econ 101. What am I missing?

  5. Great phraseology, Joshua:
    “… we are interested in the short-term consequences and so we want to avoid drains now.”
    Given the subject matter, one might argue that a drain is exactly what we need!

  6. agree – both sides focussed on the politics rather than the economics and the full net benefits over the longer run.

    if sustainable australia is not flexible enough to respond propeprly to a $5bn unexpected shock to its physical capital…..somebody help us!!!!!!!

    the first ladies of Qld and Australia are simply vote catching and in qld’s case that less than a year away – not four – and even the bannabenders can remember the mining tax catastroph at the last federal election!

    if our supply side can not adjust than we have to slowdown/stop other less important govt projects with lower npv’s

    or even bvorrow ….take on some debt since most of this spending has very long run returns that could readily paid for later

    sustainable australia….that’s a joke – if a small shock like this is managed this way

    let’s do something about our potential growth rate rather and increase the rate of return on the lucky country !!!

  7. ps …and let’s not support wealthy people that bought on flood plains and did not insure….moral hazard associated with banks and people should be countered

    buy back the land from these people at a deep discount, turn it into public parks and let wealthy people move to other suburbs

  8. The various news reports claim that people in flood affected areas won’t have to pay the levy. Other than the moral hazard arguments (and since its means tested, anyone who lost their business presumably wouldn’t have to pay it anyway), is this legal?
     
    The constitution allows for “taxation; but so as not to discriminate between States or parts of States”, but a levy that is based on whether you live in a flood affected area would seem to be discriminating based on a part of a state… Any lawyers here?

  9. Bradley, IANAL but whatever the plain meaning of those words it is clear that the courts have managed to find an interpretation that renders them inoperative.  We’ve had the <a href=”http://www.aph.gov.au/library/pubs/rn/2000-01/01RN26.htm”>Zone Tax Offset</a> and its predecessors since 1945, the whole point of which is to discriminate between parts of States.

  10. As usual, the arguments given for the policy are absolute gibberish. Kind of reminds me of the gulf war.
     
    For instance, Gillard keeps saying that “In 2012/13 our economy will be running hot…” as a reason for getting back to surplus by then. Does anyone really believe two year forecasts? The US or Europe could implode by then. We have no idea.
     
    The other argument is that the levy will somehow help the poor flood victims. So Gillard is going to let then wallow in mud indefinitely if the green vote her levy down? Of course not. Qld will be rebuilt period. Mark the money down as committed. The ONLY purpose of the levy is to get the budget closer to surplus. Why? We are back to the first silly argument above.
     
     

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