Monday, January 24, 2011

When the Levy Breaks

How did it come to this?

Disasters are supposed to be good for Governments – it’s when leaders can show leadership, because let’s face it most of the time leaders go round looking for something to lead – it’s why Howard was big on taking up micro/state level issues: he wanted to be leading the debate on whatever hot button issue he could find, and if he needed to he’d create one. But give Howard his due – when something happened that didn’t actually require confecting in to an issue – such as the Port Arthur massacre – he knew it when he saw it, and he knew it was an opportunity to change the game.

imageBefore the Port Arthur massacre no one would have seriously thought strong gun laws would have been introduced (let alone by a conservative Government). But Howard judged that a shift had occurred and he brought in laws which now are almost universally acclaimed as his greatest non-economic achievement.

Kevin Rudd also liked to go looking for things to lead. He even tried the Howard-route on micro/state issues when he bought into the Bill Henson story. It was clumsy and just made the Labor-base uncomfortable as they saw their leader acting like a poor-man’s Howard. The key to wedging the opposition is to pick an issue the opposition doesn’t want to agree with you on – there was really no problems for Brendan Nelson at the time agreeing with Rudd on Henson.

Rudd however, like Howard, did do well when a real moment occurred requiring leadership – the Global Financial Crisis. He stood up and did what was needed to be done (and for those of you who still disagree, just look at the scoreboard – it worked).

But as with the confected issues, Rudd again did not go the whole way as would have John Howard. Back in October 2008 when Rudd and Swan announced the massive stimulus packages and the western world felt like it was about to fall into the economic abyss, they were still too scared to talk about a deficit. They failed to realise that at such a point, people didn’t give a damn about deficits and just wanted the Government to do something to ensure they kept their job.

Which brings us to the floods and Julia Gillard.  

It took about one day for the media to be asking her about the affect of the floods on the budget – more specifically the “good for some reason we can’t really define” surplus. She batted the question away saying the return to surplus in 2012-13 was still on target. Abbott quickly bought in on the issue dopily suggesting that the cost of the floods meant the NBN should be dumped. Abbott’s argument is puerile, but it is an argument Gillard should not even be needing to have.

After the first press conference I suggested on Twitter that Gillard was again showing the ALP was scared of the “D-word”. Channel 10’s Stephen Spencer, who knows how things work in the press gallery as good as anyone, said that if she had said anything else she would have been crucified as using the floods to get out of a political promise.

That may very well be true (it is always best to assume the conservative media will take the most negative spin on any statement made or not made by Julia Gillard), but a week or so on, the position she has taken has not helped her.

Talk now has moved on to whether or not a flood levy should be established (this seems to have been first leaked to The Oz’s David Uren in a manner so smacking of test balloon that the Government didn’t even let him cite “Government sources").

Now first off, the Liberal Party, and especially long-time Howard Government Minister, Tony Abbott, have shown themselves on the levy issue to be the biggest bunch of hypocrites since the pot came out one morning and called the kettle black. Back in January Abbott had this conversation with Lyndal Curtis about a levy he wanted to introduce:

LYNDAL CURTIS: You've accused the Government of wanting to raise taxes for the CPRS (carbon pollution reduction scheme), for health yet you are proposing exactly that and raising it on one of your core constituencies at a time when they want a cut in company tax.

TONY ABBOTT: Well sometimes, sometimes, you have got to make the tough calls, Lyndal. I mean if we are going to have this scheme anytime soon, it has to be paid for and the fairest way to pay for it is through a levy on larger business.

So it was ok to bring in a levy for maternity leave but not to help pay for flood damage? And if levies are so terrible, where the hell was Tony Abbott when the Howard Government brought in the:image

  • Aircraft Noise Levy
  • Firearms buyback levy
  • Stevedoring levy
  • Dairy industry adjustment levy
  • Ansett levy, and
  • Sugar Industry levy

I guess they were all ok, even though for many of them they were brought in when the budget was in deficit (thanks to Stephen Murray on Twitter for the link).

But still, regardless of whether or not economically the NBN should be cut, or whether or not there should be a levy, and regardless of whether or not Abbott’s position is asinine, hypocritical or economically ignorant, it doesn’t matter, because the ALP should not be having this argument.

The flood was a moment in time that a natural leader would have seized to change the conversation.

Now I don’t mean she should have used the floods politically in an Abbott sense, which was him using the floods to argue against something he was against before the floods. No, what I am talking about is Gillard using the floods to shift political discussion in this country from the years of Costello and Howard to the point where we accept what we all inherently know, namely that deficits or surpluses don’t really matter.

And let me tell you this – they don’t.

In and of itself, whether or not the budget is in deficit or surplus is no indicator of a Government’s ability to manage the economy.  We were fed the line that surpluses and deficits were good by Costello and Howard for a decade (who had seen Keating use it to good effect as well), and the media largely went along for the ride, to the point that the ALP, through Rudd, felt it needed to try and avoid a deficit even though the world economy was collapsing!

What utter madness.

Don’t judge Governments by the size of their surpluses, judge them by the unemployment level, the GDP growth, the interest rates, the inflation rate. Judge them by indicators which actually measure things in the real world that affect real people.

Judging a government by the size or lack thereof of its surplus is like judging a football team by the average age of its players. In and of itself you don’t want your team to be too old or too young, and in the long run too old will inevitably lead to a bubble (see the Australian cricket team, or the Adelaide Crows last year), but a team that is young is not much better – especially if it keeps losing each week. No you judge a team by how many games it wins, and whether or not it wins the flag. 

imageGillard made a decent stab at answering the “why do we need to be in surplus question” when on the 7:30 Report last week:

SCOTT BEVAN: Even if no-one is certain of the amount yet, and you do know, what everyone knows is it is going to be huge and that the lion's share of that cost will be borne by the Commonwealth.  Now in light of that, what economic reason - economic reason - do you have for pushing on for a Budget surplus for 2012/2013?

JULIA GILLARD: Well, put simply, the economic reason is our economy will be running at close to full capacity at that period of time.
We are facing a big repair bill for Queensland and we are facing economic consequences of the floodwaters.

To take an example, Queensland's supplies 80 per cent of our coking coal - the coking coal that comes out of Australia. It exports $100 million of it a day and 40 mines, around about, haven't been able to work during the floods.

So, yes, this is having an impact but we've got to remember our economy is strong, with a large pipeline of investment coming through. That means by 2012/13, our economy will be running hot and when your economy's running hot, that's the right time to be having a Budget surplus and saving for the future.

Now she was right to an extent – a reason for running a surplus is that if the economy is running hot, a deficit will (all other things being equal) be inflationary and off we go on the road to high interest rates. But her second point about Queensland’s coal industry taking a big hit destroys her previous position, because it does not suggest an economy running hot. She says the economy will be running hot in 2012-13, but do we know that for sure now?  The hit Queensland (especially its coal industry) has taken will likely lead to a quarter of negative or near negative growth for Australia’s GDP, when you take a negative hit, putting on a levy is pretty counter intuitive (and so to by the way is the Liberal’s desire to cut back on other areas of spending – that’s not going to improve growth either).

So Gillard, by taking the surplus or death line has given herself almost no out.

If the hit to the economy is worse than expected (in growth terms) then she has instituted contractionary fiscal policy at a time the economy is contracting. If the GDP growth hit is not so bad, then she will have to explain why she is instituting a levy on something that was not as bad as expected, and will also be trapped into Abbott’s dumb (economically, but smart politically) game of you should have cut the NBN etc. Either way she is in a position that does not work for her or the ALP.

If she gets the budget back into surplus with a levy, she’ll find no one really gives a damn, because the levy will get the credit not anything she has done (in effect taxpayers will think they paid for the surplus – Howard got credit for the surplus because people didn’t feel like they had had to sacrifice to get it – so they’ll be no joy for the ALP at all). If the economic-hit from QLD isn’t too bad, then the Government will still have a levy, but one that people will now think is unnecessary.

So basically we see the ALP in a position where they will get back to surplus and no one will care one little bit that they have.

Far better to have thrown out the rule book. Far better to have realised this was a moment in time in which a shift has occurred – namely, who gives a shit about surplus or deficit – fix my house, the roads, my kid’s school, the local hospital.

Far better for Julia to be saying that questions of surplus or deficit are secondary (nay, almost irrelevant) at times like this. Far better to say that of course in usual times Governments should be striving to be in surplus, but look around you, does anyone here see usual times? The people of Queensland are crying out for help, does Tony Abbott really think we should be cutting back on services, cutting back on spending or infrastructure, and tightening our belts when people are without homes? And as for cutting NBN? Well I’m sorry but the challenges of the future don’t go away because of tragedies – the NBN was necessary for the future 4 weeks ago, it remains necessary for the future today. You don’t stop building infrastructure whenever a natural disaster occurs – in fact as we rebuild Queensland we will build the NBN. We will rebuild Queensland better than before.

And surplus or deficit? We’ll leave that until the full economic picture becomes clear. Really, right now, it is a side issue for economists and journalists – I’ll care about the real world.

And yes I know she would be “using the floods”, but I look around and I see Abbott having no such concerns, and I see him getting zero criticism from the media. And at least it may lead to a better economic discussion in this country.

Seize the moment – be bold, and lead.

Won’t happen of course.


JudgeG said...

Great post, Grogs. Again. You're saying what a lot of people are thinking about Julia. I wonder when she will step up to become a real leader of stature. People are desperate for her to drop the spin.

I keep waiting. And I keep voting Labor of course...whilst thinking "if only she.....

Red Bakersen said...

Wow. You should be Julia's speech writer.

The ALP needs to stop being afraid. If Julia said the deficit was unimportant in light of recent events, you know Abbott would have been all over that. So she maintains her promise of an unnecessary surplus to keep the Coalition off her back. It's a weak, defensive strategy. As you said, she needs to stop worrying about the deficit and focus on rebuilding Queensland and the necessary advancement of Australia's infrastructure.

Wolfcat said...

Sadly we are seem to be passed the time of great leaders...

Even Kevin, with the amazing sorry speech rolled over on climate change.. and got rolled in the process.

Tony is hell bent on saying taxes are bad... drugs are bad... NBN is bad... everthing is bad.

Leaders of bothsides are to busy looking for the soundbite and not for the big picture.

It is a pity, because there are opportunities to think large. Like the NBN, which should be an easy sell for the Govt, yet, they can't even get that message right.

The floods do represent an opportunity, but the soundbite will be the only winner.

imfabs said...

They're still looking for bodies in Qld. People in towns in Victoria are currently scrambling to try and build up defences for themselves against a mass of water that is just not even comprehensible. Others are being told their efforts were in vain and they need to get out. Others have been isolated in their towns for over a week because they stayed to dig up the roads in and out of town to use as new levees, or just to work 10 hours a day lugging sandbags. Still others are just wondering how on earth they can possibly clean up the mess left behind.

Meanwhile, Abbott is arguing that governments should spend less, and Gillard is defending such an abstract fucking concept as a surplus budget 2 years from now, like that matters to anyone right now.


Graeme said...

Mr Gamut. I half agree. But it is odd that you praise Howard on the gun buy back yet forget ... he did it with a levy! (Extra Medicare levy).

Also, the fiscal argument would surely lead to an assumption that Queensland should go into heavy deficit and then tax its way out of that in a year or two. After all its a geographically inherently QLD risk/event. But vertical fiscal imbalance makes that unreasonable, and the fact that QLD is already economically behind the eight ball renders it unlikely. A levy spreads the pain nationwide. a deficit does too, but spreads the pain temporally as well; politically, being hypothecated, it is easier to sell than a tax rise some time hence. I'm not sure we should be borrowing from the future for present clean ups, given that serious natural disasters and extreme weather are something not uncommon and likely to grow commoner.

Kerryn Goldsworthy said...

'And yes I know she would be “using the floods”, but I look around and I see Abbott having no such concerns, and I see him getting zero criticism from the media.'

Well, yes, but there's an inherent flaw in your reasoning here, as you've pointed out yourself in the post. What's media sauce for the Abbott gander will be media poison for the Julia ... um ...

Dermott Banana said...

Yet again, we see Labor losing opportunities because they are scared to the point of paralysis of John Howard.

Niall said...

superb effort. Spot on with the Gillard critique balancing the Abbott critique, both well deserved. Truth of the matter being that while politicians continue to feed pap to the electorate, the voters will continue to lap it up. We have no statesmen/women as elected representatives, we have only self-serving politicians. Dare I say it, we the people need to be taking back our democracy.

Susan said...

Terrific discussion of the issues. I am so frustrated that we cannot have a sensible debate on this: we face additional unforeseen and unavoidable costs as a result of the floods; this can be funded by some combination of increased borrowing, reduced spending on other things and increased taxation; there will be different impacts on the economy and on individuals depending upon the choices made; let's have a think about what might work best.

Graeme, I don't think Grog was suggesting that levys are bad things per se. Rather, he was highlighting Abbott's blatant hypocrisy on the issue.

By the way, there was another Howard levy - the superannuation surcharge, which Costello, when scrapping it, retrospectively defined as a temporary levy to deal with the budget deficit.

Airefuego said...

Great post Grog.

There's one aspect that I might disagree with though.

You've suggested "If she gets the budget back into surplus with a levy, she’ll find no one really gives a damn, because the levy will get the credit not anything she has done (in effect taxpayers will think they paid for the surplus – Howard got credit for the surplus because people didn’t feel like they had had to sacrifice to get it – so they’ll be no joy for the ALP at all)."

I think she would get credit for the levy, if it's small enough to be relatively painless.

I think that she would be looking good in the scenario where a levy is imposed - a modest one, so no-one feels really aggrieved - and the budget also ends up in surplus (which people seem to think is good).

Then Gillard can claim "we're still in surplus and the economy is strong, even though we had the floods. Labor took the tough decision for the good of the economy and the coutry. We pulled together and came out stronger. By contrast, the Coalition would have sat on its hands again - like it did during the GFC - and we would have been worse off. The Coalition talks tough about economic management, but all they do is cut things and sell things. Labor builds things and Australia gets stronger."

I think this line would be very powerful - if the numbers line up.

@AndySHastings said...

Economic literacy amongst our leaders in this country in woeful.

"... that's the right time to be having a Budget surplus and saving for the future."

This is just so wrong it's tragic. A budget surplus for a Government that is the sole issuer of the currency is not, in any way, saving for the future. It is, in fact, destroying real private financial assets right now.

Bill Mitchell has a great post on the real economics behind this issue: "Not the time to be cutting spending or raising taxes"

Anonymous said...

Bud get Sur plus Bud get Sur plus Bud get Sur plus. It was like constant drum beat tattooed on our brain. I know perfectly reasonable people who freak out when they talk about the lack of a budget surplus yet when I ask why they believe it is so important, they really don't have an answer other than the few who argue it saved us from the CFC. I think the constant referencing of the budget surplus was like a form of brain washing. Look, enconomy good, budget surplus, good. Full stop. End of explanation and people lapped it up hook, line and sinker without even considering the other reasons the economy seemed good. I could sell my house and put the money in the bank. Boy, I'd look rich but what would happen to my standard of living, my health, my safety and my sanity?

Chris Grealy said...

I well remember during the 2007 campaign that the Libs were stirring up the gun nuts with the claim "If Rudd is elected he will take away your guns." I asked the complainants what the Liberal policy was, and they invariably replied, "no gun control at all." Then I would carefully explain to them that it was Howard, a Liberal Prime Minister who had introduced the current regulations which they deplored so heartily, and that Labor had no plans to change those laws. Their confusion was something to behold. Sorry if this is off-topic, but it always made my day :)

Maria said...

The whole federal government inability to communicate thing is so bad I have having to read the newspapers behind the sofa.

On an almost completely unrelated topic, but asking any passing fonts of wisdom, will the rest of the country be able to watch the NSW election night coverage live on any of the new abc channels? There's so little Australian comedy out there that it seems mean to stop the rest of us...

Hillbilly Skeleton said...

You're starting to sound like Bernard Keane...'Julia Gillard is bad because she's not Paul Keating in a skirt. She just needs to grow a pair.' Oi vey!
Now, think about things logically.
The first question out of the box by the ferals in the Press Gallery was, "Are you still going to be able to bring the Budget back into Surplus by 2012/13?" Now, you may so it just takes 'Leadership' to put them back in their box. I say, 'Piffle'. If she had said the Budget was going back into Deficit to pay for the Flood Reconstruction, they would have been all over her like a rash and 100 point banner headlines would have blared from the front pages, as well as the opportunistic Opposition would have not been able to believe their political luck.
It's real politik. Not idealistic blogging. And JG is smart enough not to get out the shovel and start digging a hole for herself like that.

Greg Jericho said...

Susan, you're right, I'm not completely against a levy at all. I'm not even against a flood levy. I'm just against a flood levy if the whole reason for it is to ensure the budget is in surplus in 2012-13.

Patricia WA said...

Our Mates Ain't Heavy. We'll Take A Levy!

Why is 'The Australian' so kind
To Abbott’s not so little mate?
Why listen when he feels inclined
To spread bad news and speculate
On anything that comes to mind
To stir the pot and fester hate?

Why, even on Australia Day,
Let Hockey throw political mud?
I thought it was the Aussie way
To fight as one through fire and flood.
Let's read what Julia has to say!
Help her to stir the nation’s blood!

That paper’s name is a call to arms!
Their masthead's a declaration
They'll fight anything that harms
The heart of our young nation!
Reporting truth with less alarms
Would help all Oz. Perhaps too - their circulation.

Alistair Baillieu-McEwan said...

In addition to the modest levy that will be imposed why on earth don't we tap the sacrosanct Future Fund which was supposedly set aside to provide for the future requirements for superannuation of public servants (sorry Grog) and politicians? There are billions in there as well as still a healthy chunk of Telstra shares which could be utilised now and offset from future surpluses. Although David Murry and the gormless one (now known as AC/PC) will shriek at the thought of "their" plaything being used for anything but bolstering the sharetrading activities of big money it is "spare" money in the sense that as a chunk of taxpayers funds paid in advance there should be some redraw facility.

morewest said...

My understanding is that the current budget contains a contingency of $5 billion for just such a disaster as the eastern states floods. Moreover, in the forward estimates another $11 billion was allocated for 2011-12.

So there seems to be absolutely no budgetary need for a levy. The money is already in a fiscal hollow log so the floods would not have affected the return to surplus by either a dollar or nanosecond.

However, there is another potentially large Damocles Sword hanging over the Federal Government as a result of the floods. Reconstruction will give the economy a very significant boost at a time when other sectors of the economy, particularly mining, are also gathering pace. Together both factors threaten to blow out the still lowish interest rates.

As one affect of the levy will be to dampen demand, it may be that Cabinet has judged the political hit from the levy will be less than from higher interest rates.

Greg Jericho said...

morewest - no that's wrong. The contingency fund is not for emergencies in the flood sense. It is for overspends in demand driven programs such as medicare and even drought relief assistance.

julian dunmurphy said...

When will we get a chance to vote for you?