Today, I winced when I saw this headline: “Hockey ramps up fight against flood levy.” I thought the Opposition moved to US-style nay-saying just for the sake of it. Then I read on:
But Opposition treasury spokesman Joe Hockey is urging the Government to focus on budget cuts, and his argument is two-fold.
He says a flood levy would cause economic grief for Australian households and that cutting spending on projects like the National Broadband Network and the school building program would help free-up tradesmen who could be better used in the flood recovery.
He has a point. Re-building will require jobs and, in many cases, they will be the same jobs we use to build infrastructure. A simple way of dealing with flood damage is allowing those states receiving funds for various things to drop those projects and reallocate them for reconstruction. It is deficit neutral and also won’t simply lead to inflationary pressure on wages. Of course, it is unclear that that will be enough but it is a good place to start.
We will likely need to raise taxes too. A general levy (like that for the gun buy-back) sounds like a good and simple way to go but the one thing it does not quite do is single out the winners from the losers from the flood. “Winners?” you say. Yes, there are winners at least in theory. Let me give you one example — although I stress I have no idea of the magnitude of this — farmers. Not the farmers who lost everything although there existence is the point. No, the farmers who didn’t. We are told that the flood will lead to higher food prices. Those revenues are going somewhere. What that means is that there will be some short-term rents earned. What you want to do is tax those rents.
One thought I had was to put the GST on fresh food (at least for a year). As John Quiggin stressed a decade ago, food expenditures are inelastic so whether you leave them out of the GST it is nondistortionary. Same applies for when you put the GST on them. In this case, that means it will skim off the rents being earned as a result of the flood (and indeed the drought) by agriculture that fortunately was out of the way of rising waters. I’m not sure this will do the trick — it is a theory — but if it does I’d love to see a politician sell that!