Drowning In Gillard’s Flood Levy Spin

The Prime Minister first raised the prospect of a flood levy 10 days ago. Her government wants taxpayers to believe the levy is an unavoidable consequence of the natural disaster in Queensland – imposing a special tax is regrettable, but out of the government’s hands.

Yet the day she signalled the flood levy also happened to be a day when her minister Kim Carr quietly announced the start of the government’s Automotive Transformation Scheme. This scheme packages up $3.4 billion of taxpayers’ money and wires it directly to the dilapidated (but very well connected) car industry.

No one begrudges spending to fix Queensland’s damaged infrastructure. The flood reconstruction is not an optional spend. But the money the Rudd and Gillard governments have pledged to give the car industry over the past few years has been.

All up, the government will spend $5.6 billion on flood reconstruction in Queensland, New South Wales and Victoria; $1.8 billion of that will be raised by the flood levy. The rest, certainly, will come from budget cuts. For instance, Julia Gillard announced she would cut $234 million of automotive subsidies to help pay the Queensland bill. But that is a paltry sum, considering the rest of the government’s car programs will continue. Especially considering eliminating the balance of these programs would easily cover what the flood levy is intended to raise. The full New Car Plan for a Greener Future totals $6.2 billion.

Same with the cuts to climate programs. It may sound like Gillard has made hard decisions cutting $250 million out of carbon-capture research and $160 million from the solar hot-water rebate scheme. But simply trimming a couple of the most embarrassing programs – such as the ”cash-for-clunkers” election promise – is hardly aggressive budget cutting. Governments should be congratulated for any cut of wasteful spending. But there’s nothing about Gillard’s cuts that makes the levy a necessity. It is still a very avoidable tax hike, despite the Prime Minister’s claims.

She gave the game away at the National Press Club on Thursday, when she said: ”The great majority of Australians are ready to contribute” to Queensland’s rebuilding. Special levies are only enacted when the government feels confident taxpayers will fork out with minimal resistance. The Howard government was comfortable imposing a gun buyback levy in the wake of the Port Arthur massacre because public opinion clearly demanded action on guns. We are never charged special levies for unpopular things. There has been no automobile subsidy levy; no Kevin-Rudd-wants-a-spot-on-the-UN-Security-Council levy.

So the worthier the use of public funds, the more likely the government will charge taxpayers extra for it. What is funded out of existing revenue and what is funded with a special levy is a political calculation – made by politicians with a close eye on what the opinion polls will bear – not a public finance calculation.

This is the context in which we have to understand the flood levy. But instead we have heard claims that critics of the tax resent helping flood victims. Or that the spirit of ”mateship” requires the government to temporarily increase taxes. These are emotional arguments designed to achieve political goals.

The politics of the flood levy underlines how momentous the government’s decision was to flush the economy with stimulus spending during the financial crisis. You only get one surplus to spend on a national crisis. Rudd’s ”kitchen cabinet” decided that crisis was the GFC: $90 billion worth of spending commitments between September 2008 and May 2009 plunged the federal budget into deficit. We won’t ever know how our economy would have fared if it saved the surplus for a later crisis – such as the floods.

But the Treasury admitted last year there was no statistically significant correlation between the size of an OECD country’s stimulus package and its economic recovery. Some countries – Japan, for instance – spent more than us and yet suffered worse than us.

The debate over the stimulus package is well rehearsed. But the flood levy makes it necessary to revisit. The federal budget is rich with fat. Yet Gillard suggests she cannot find spare change to rebuild the country after an unprecedented natural disaster. If she genuinely can’t – if there are really no government programs left to cut, no funds to spare and no alternatives to a tax hike – then the decisions taken over the past few years, which have placed the Commonwealth budget in such a dire fiscal situation, need to be scrutinised more than ever.