Paying for the Queensland floods

The Government no doubt judged that a temporary increase in taxation (wouldn’t Kevin Rudd have loved the resulting acronym?) skewed towards those earning well above the average will appeal to most Australians’ notions of fairness. And there’s probably not much political downside either: the Labor Party probably doesn’t get a large share of the votes of those earning over $100,000 per annum, and those among that group of taxpayers who do vote Labor probably do so out of convictions that won’t e swayed by having to pay a little more tax for 12 months.

But the "flood levy" was in no way necessary to ensure that the Budget returns to surplus by 2012-13. All but $235mn of it will be collected in 2011-12, a year in which the Government is expecting a deficit of $12¼bn. If it had chosen not to impose the levy, the surplus in 2012-13 would have been reduced by the $235mn which Treasury expects will be collected in that year, plus around $100mn of addition interest payments on the $1.8bn which it would have otherwise borrowed in 2011-12. That would still leave a surplus of over $3bn.

Again, this hardly the sort of difference that would prompt the Reserve Bank to lift interest rates. Indeed Reserve Bank Governor Glenn Stevens confirmed as much in his statement following yesterday’s Board meeting, expressing the judgement that "the net additional demand from rebuilding is unlikely to have a major impact on the medium-term outlook for inflation".

I accept that the "flood levy" has been calibrated in such a way as to minimize the likelihood that it will adversely affect consumer spending. Those who have to pay the bulk of it will probably do so by reducing saving, rather than by cutting spending. But that just re-inforces the point that, in its absence, there would be little if any impact on interest rates.

I’m not saying that the Government has made bad choices (with the one exception mentioned above). But let’s be clear: the Government has made choices, and those choices were dictated more by political judgements than by economic ones.