A little levy, that hopes to go a long way

Today Julia Gillard at the National Press club announced the Government's flood relief package. As we all expected after a good week or so of backgrounding to the media, it included a levy.

The levy is not ‘huge’. Yes, it will raise $1.8 billion – which I grant you is a big enough figure that you would get a little bit excited were you to find it between the cushions of your sofa – but in the whole budget perspective it’s not the biggest thing going around. In fact it is so small that you have to wonder why the Government is bothering (as Possum nicely points out).

The impact of the levy on householders is also not too severe – 96 cents a week if you earn $60,000; $2.88 a week if you earn $80,000; $8.65 if you earn $120,000. Given all the talk in advance this week about the levy this amount seems rather small – perhaps finally the ALP has worked out how to come out with a policy that fits well with the pre-sale rhetoric. The progressive nature of it also fits in nicely with their working-class base.

The package also included the government dumping a stack of environmental subsidies and other programs:

• Not proceeding with the Cleaner Car Rebate Scheme
• Abolishing the Green Car Innovation Fund
• Reducing and deferring spending on the Carbon Capture and Storage Flagships and Solar Flagships programs and the Global Carbon Capture and Storage Institute
• Abolishing the Capital Development Pool from 1 January 2012
• Discontinuing funding for the Australian Learning and Teaching Council
• Reducing the National Rent Affordability Scheme dwelling target
• Redirecting funds from the Priority Regional Infrastructure Program and Building Better Regional Cities Program
• Capping annual claims under the Liquefied Petroleum Gas (LPG) Vehicle Scheme
• Capping funding for the Renewable Energy Bonus Scheme – Solar Hot Water Rebate
• Not proceeding with Round 2 of the Green Start Program
• Capping funding for the Solar Homes and Communities Plan
• Withdraw funding to the O-Bahn City Access project.

These cuts are smart politics. Few voters will care about the Green Car Innovation fund or the Cleaner Car rebate scheme (especially as it was known everywhere as the cash for clunkers scheme).

The levy is small enough and cuts in at a level high enough also for it not to involve much political pain. Sure some talk-back shock jocks will like to make a big deal about people deciding not to donate money now, but personally I think such impacts are massively overstated (unless you think most people have been waiting to donate up till now). People also generally know there is a difference between private donation and things done by the Government. People don’t donate to rebuild a road, they donate to help provide for people who have lost everything.

Gillard’s speech as well was smart – and quite well received. Laurie Oakes on Twitter soon after wrote:

The most prime ministerial Gillard performance so far.

It was a decent speech that had some good lines:

I also went to Toowoomba to express my admiration for the way Australians have started rebuilding already.  Whether with a mop or a shovel or a bulldozer, Australians see what needs to be done and are doing it.

It is no different for the Government. I see what needs to be done and I will do it.

The great floods of this summer have destroyed billions of dollars of wealth and robbed us of billions of dollars of income.  In time they may prove to be the most expensive disaster in Australian history.

We are grieving.

We are burying the dead.

We are thanking many thousands for their courage and selflessness.

We are moving from crisis to recovery.

Now is the time to count the cost and to start to rebuild.

That is a good way to get the discussion on to what she wants it to be on – the rebuilding, the recovery – and show that she and her Government are doing something, rather than talking about it. The line: “I see what needs to be done and I will do it” is a cracker. 

She made her case for the levy:

Treasury’s preliminary estimates are that GDP growth in this financial year will be around half a percentage point lower due to the floods.  The Treasurer will be saying more about the future impact on the economy in coming days.

But we still have the advantage that our overall economy is strong and that means we have the capacity to pay as we go”.

With our growing economy and rising national income, we can pay for rebuilding now.  And if we can, we should.  We should not leave the task of finding the money until future years.

My experience in Government since 2007 tells me that while we must plan to sustain growth we must never take future growth for granted, so we should not put off to tomorrow what we are able to do today.

Solely borrowing to rebuild Queensland is a soft option I am not prepared to consider.

My Cabinet’s job is still to make the decisions which will bring the Budget back to surplus in 2012-13.

In a growing economy, we pay as we go.

Now personally I think the whole “we pay as we go” line is pretty simplistic in an economic sense – but it has nice cut through (though, please don’t over do it and use it every interview). The whole not putting off till tomorrow what we could do today is also a good argument FOR a Government borrowing, but that’s ok.

My main quibble with the speech, and also her answers to some of the (generally very good) questions, was that she played up the strengths of the economy so well that it rather undercut the need to have a levy at all.

Abbott of course came out against it. His opposition may have been effective were it not for the fact that almost 12 months ago he was making a big deal about paying for his paid parental leave scheme with a levy (which he was at very great pains back then not to call a tax). It makes him and the Liberal Party MPs coming out in opposition to the levy seem the biggest hypocrites going round. Gillard obviously thinks Abbott’s opposition to the levy is good for her, because when the opportunity came at the Press Club for her to mention Abbott’s position she, for the only time in response to a question, looked straight at the camera rather than the questioner and said:

I’ve seen what the Leader of the Opposition has had to say about that, and too the Leader of the Opposition, to the Liberal Party, to the Coalition I would simply say, if it was good enough to actually say you would impose a levy to fund their election commitments how can it not be good enough to have a levy to fund the rebuilding of Queensland? How can you possibly justify that?

It was a nice slightly feistily delivered line. The last question was delivered with withering disdain.

For those of you wondering what line Gillard will take come Question Time in February, you’ve just seen it. The ALP will bash Abbott again and again with his own policy. It was a policy the Liberal Party didn’t even want, and many must have hoped after the election it was gone, but the ALP will use it again and again in the next few months. Abbott may say as he tried today that his levy came with a drop in company tax so it really didn’t cost anything. But such lines only serve to highlight his economic illiteracy.

My main dislike of the levy is the implication behind it that somehow we must get back to surplus by 2012-13 or God help us inflation will run rampant and all will be lost. The fact is this levy will not do much of the “heavy lifting” in terms of getting us back to surplus - that will, as ever, be done by tax receipts (company tax ones). But today Gillard at least went away from talking up the glories of surplus and used language that is economically meaningful:

There is unprecedented demand in many parts of Australia for skilled labour. Unemployment is already low and participation is already rising.  And that’s before we add one extra tradie or truck driver to rebuild after the floods.

There is unprecedented pressure on Australia’s infrastructure as well.

More infrastructure is already needed to nurture the mining boom and support economic growth, so the Government is investing in long lived economic assets and infrastructure like high speed broadband, ports, roads and rail. Now we have thousands of kilometres of roads and rail to rebuild as well.

Simply spending to rebuild without addressing the balance between supply and demand in the economy as a whole is not an option.

That would only drive up the cost of skilled labour and the cost of building materials and other economic inputs, reduce value for money in the rebuilding itself, rob our mining industry and other economic sectors of the skills and material they need, and ultimately spill over into higher inflation and interest rates.

To make up for the demand we are putting into the economy with our rebuilding efforts the Government must take some demand out of the economy at the same time.

So sound Budget principles say we should pay as we go – and sound economic principles say we should not add to capacity pressures.

Now that all makes good sense and doesn’t use the return to surplus three years early” line which is so much economic bull. In fact she only mentioned the word “surplus” once in her speech and that was when she said:

My Cabinet’s job is still to make the decisions which will bring the Budget back to surplus in 2012-13.

But other than that, it was macroeconomic fundamentals rather than budgetary voodoo. I may argue that we can afford to borrow to pay for the rebuild rather than raise a levy, but I can’t fault the logic of Gillard’s argument as she made it.

There will definitely be a skills shortage due to the rebuilding, and the reorganisation of the infrastructure programs in Queensland is a good idea – after all you build infrastructure where it is most needed, and there’s no point upgrading a road if there is a highway elsewhere that is completely stuffed. The decision to allow quicker approval for 457 visas is also smart – though it does only serve to highlight that we don’t have enough skilled people in this county (and I write this as a bloke who is completely without such skills).

The politics of this all will be very interesting. The Greens of course will hate the cuts to the environmental subsidies and if they do let this through, you can bet they will be making the ALP pay when it comes to this part of Gillard’s speech:

The key to these carbon abatement program savings is my determination to deliver a carbon price.

There is complete consensus that the most efficient way to reduce carbon is to price carbon. Some of these policies are less efficient than a carbon price and will no longer be necessary – others will be better delayed until a carbon price’s full effects are felt.

The Independents seem to be a tad fence sitting on the levy – it seems they would like a permanent disaster-insurance levy. Such things sound nice when you just flash them out in a TV grab, but implementing them is a touch more tricky – such as when you have to decide what things would the fund pay? Would it for example help pay for people whose houses are destroyed but which were uninsured? The last thing you would want is to create any sort of a disincentive for people to take out their own insurance. But if the independents are after a permanent levy, I can’t see them knocking back a temporary one (though I have no idea what Steve Fielding’s view on it all is) .

So the battlelines (to use the phrase so beloved by Abbott) are set. The ALP are for the levy – all Australians pitching in to help out, and we’re still going with the NBN – and Abbott is against the levy and wanting to cut away at lots of “fat”(most of which will involve things he is regurgitating from the 2010 election) and the NBN.

I don’t think the ALP is scared of this fight – I think they’ll play the “Why was it good enough 6 months ago, but not good enough for the struggling Queenslanders” line very hard. (And they’ll love that the Liberal Premiers seem to be supporting the levy.) It is about time they (and Gillard especially) start playing hard – they and Gillard have been in a funk since the election. People wanted Gillard to be “a leader” during the floods but she is better suited to the battle. Above all this year she has to not be afraid to look and sound tough – and  that doesn't mean scream and yell a-la Abbott or Costello or even Keating – it means be steely.

One of the main reasons I was so surprised by her inability to truly connect during the floods is that she is as good as anyone at getting across her meaning with a few words – just think of her saying “game on” to Abbott last year. She can cut through quickly and with great understatement – she is also very good when just having a chat with people. It was almost like she didn’t know what tone to adopt during the floods. 

She had no such problems today; nor will she in Parliament.

It’s a pity Question Time is still two weeks away; the political fight of 2011 should be a cracker.