Fallow on paying for the quake

Brian Fallow writes:

Key is right to be dismissive of the idea of an ad hoc tax akin to the Australian flood levy.

If levied on the same basis – half a cent in the dollar of income for those earning between $50,000 and $100,000 or 1c for those earning above $100,000 – a back-of-the-envelope calculation indicates it would bring in a bit less than $500 million. About half would come from those earning between $50,000 and $100,000.

There is an opportunity cost to such an impost. It is money they cannot spend on consumption or investment elsewhere in the economy.

The economy started this year without a whole lot of momentum.

Export prices are at all-time highs, true, but many farmers are using the money to pay down debt and the flipside of the commodity boom is more and more of people’s incomes is soaked up by such necessities as food and fuel.

For firms chasing the consumer’s discretionary dollar an ad hoc levy is the last thing they need.

I totally agree. Putting taxes up when you are on the verge of a recession is daft.

As for calls for cuts to programmes like Working for Families or student loans, the case for such policy changes is no better or worse than it was before the earthquake.

They should be considered on their long-term merits. They should not be trundled through under cover of an all-purpose excuse, the cost of Canterbury’s misfortune.

I also agree. An inctreased abatement rate for WFF should occur because National doesn’t believe in welfare to relatively wealthy families, not because of the earthquake. The earthquake may prove to be a catalyst for considering the issue, but any change should be subject to an electoral mandate in November.

The response of both the previous Government and the present one to the global financial crisis and accompanying recession was to loosen fiscal policy.

They cut taxes and they let the automatic stabilisers work. As revenue took a hit and more people landed in the social safety net, operating surpluses turned to deficits and public debt rose (from a very low base).

They let the Crown’s balance sheet take the strain. It was the appropriate policy then and it is again.

This is a one off shock. The balance sheet is the appropriate place to take the strain, so long as the level of debt is not so great that the interest on the debt leads to structural deficits – it there is still a credible path back into surplus.