from Crikey ......

Laugh until you cry -- can we put a levy on political stupidity?

Crikey Canberra correspondent Bernard Keane writes:

ANDREW ROBB, BARNABY JOYCE, BUDGETS, FLOOD LEVY, TONY ABBOTT

The proper response when Julia Gillard rises at the Press Club today to announce a flood levy is laughter -- the sort that slowly dissolves into tears. Tears at how stupendously awful this government can be.

Its flood levy -- for which the way has been prepared with the usual Labor subtlety and sophistication -- is wholly unnecessary and wholly political, a product of how it has first allowed its opponents to dictate the terms of economy debate, and, second, bungled its own contribution to that debate.

And it is unrelated to -- indeed, possibly antithetical to -- serious fiscal policy. Warwick McKibbin may not be on the government's Christmas card list, but he's not alone in saying the levy is unnecessary and perhaps even harmful given the state of the non-mining sectors of the economy -- Joshua Gans has made similar points. Alan Kohler has, too.

There's a serious debate to be had on our long-term fiscal strategy, including on the issue of whether the overall tax burden should rise in the long-run to address our ageing population -- a position, for example, argued by John Quiggin (who supports the flood levy). But at the moment any fiscal debate occurs in a political context where neither side of politics is willing to touch the billions of dollars of expenditure going to middle-income earners, or contradictory tax breaks. It also occurs in the aftermath of the debacle of the Rudd government's handling of the Henry Tax Review.

Roll on the tax summit -- we desperately need a circuit-breaker on our long-term fiscal strategy.

Instead, we've got short-term, lazy policy from a government that didn't have the guts or competence to keep fighting to make transnational mining companies pay something closer to what other sectors of the economy pay in tax, preferring to try to exploit sympathy for the flood victims by hitting PAYE taxpayers.

And forgetting about serious policy for a moment, in doing so, the government has created a wholly unnecessary make-or-break moment for itself. It must sell the levy first to the Greens and independents -- all of them in both houses -- and then to voters. And we know how good this government is at selling anything. There will be much talk of "tough decisions" and how the government is prepared to do the unpopular thing -- but its history suggests that unpopularity reduces this government to a quivering mess. But it can't afford to fail -- what if Tony Windsor and Rob Oakeshott decide they can't stomach a new tax? And what if voters misunderstand the tax or react hostilely to it?

Yes, the government would always have been confronted by a dilemma in addressing the floods, but it now faces a self-created problem that failure to secure passage of the levy will massively damage it politically.

The only positives in this mess is that the government is taking the opportunity to get rid of the risible Cash for Clunkers program -- although you can be assured that was going to be jettisoned in the budget in May anyway. If Gillard announces some other decent expenditure cuts today, it might lift all this from the laughable to the merely terrible.

Being right for once hasn't managed to improve the Coalition's prosecution of the case against the levy. Andrew Robb has started talking about how soft the economy is, when the Coalition's line for 18 months has been that the economy is strong and the government should slash spending. And much sound and fury has emanated from that simpleton Barnaby Joyce (the ex-Shadow Finance minister, recall), who yesterday contrasted "downloading movies" (the sole purpose of the NBN, apparently -- he omitted to mention p-rn) with the much more Austrayan activity of rebuilding after floods.

And while normally significantly saner than Joyce, Tony Abbott, remarkably, topped him by dubbing the levy a "mateship tax".

At that point, you stop crying and start lying in a foetal position, whimpering and wondering who let any of these people on either side anywhere near power.

Oh, wait .....

Why the flood levy is financially dumb

Tom Elliott, managing director of MM&E Capital Limited, writes:

FLOOD LEVY, HOME LOAN INTEREST

There are many reasons why the proposed flood levy is a bad idea, including the following:

- It'll reduce the government's popularity even further;

- The public will reduce voluntary donations to flood victims;

- Consumer spending will drop, placing further pressure on retailers;

- There's a possibility the temporary levy will become permanent;

And so on. These objections to the new tax have already been widely discussed, so there's little point in explaining them further here. One big financial problem with this and any other sort of levy, however, relates to the relative cost of borrowing between the government and households. Put simply, the 0.5% to 1.0% flood tax is not just unpopular, it's also economically inefficient. Here's why.

Most of the households at which the tax is aimed, i.e. those earning $50,000 per annum and more, are likely also to be paying off a home mortgage. At the moment, the annual variable interest rate for such loans is probably between 7.5% and 8%, with another 50 basis points of rate rises likely to arrive before the calendar year is done.

Because households can pay down a variable home loan (overwhelmingly the most common choice for Australian borrowers) at any rate they like above the agreed monthly minimum, the interest rate they're charged is effectively their cost of funds for all expenditures. That is, if they choose to forgo, say, $1000 of discretionary expenditure, then they save 7.5% to 8% of this in annual interest.

Precisely because of its ability to tax citizens with impunity, the federal government's borrowing costs are considerably lower than those pertaining to the average household. Right now, for example, Commonwealth 10-year bonds are trading at a yield of 5.51% per annum.

This means that if he wants to, Treasurer Wayne Swan can borrow money for 10 years (the approximate life of the average home loan) at a rate 2.5% to 3% less than us poor households -- yet instead of taking advantage of this glaringly obvious interest rate differential, the government's moderate financial burden from the floods is being foisted on to the public.

What Swan is doing here is a bit like a consumer who has a credit card he or she never pays off, plus a housing loan with a redraw facility. As the credit card probably costs between 12% and 20% per annum, the consumer should avoid using it in favour of the much cheaper form of finance also available (i.e. the housing loan).

Admittedly, there are people out there who do make silly decisions with their personal finances, and thereby pay a lot more in interest than they should. It's sad, however, that such financial idiocy should make its way into the federal Treasurer's office.

In a nutshell, while the government can borrow so much more cheaply than the households it's supposed to assist, there is no good reason why the flood costs should be funded at personal home mortgage rate -- which is exactly what, for most people, the proposed levy represents.