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.

Before 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:

• 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. 

Gillard 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.