Deficit Levy

Yesterday the Herald Sun ran a front page story – headed TAX SMASH – and a follow-up story in which Terry McCrann aggressively supported an Abbott government decision to include in the Budget a levy on those with high incomes to help reduce the deficit (it actually appears that there was no “final” decision). McCrann estimated it would  yield about $3bn pa and backed his support with the argument that  “it is simply inconceivable that the Government could place all the adjustment only on the spending side”.

I spent a good part of the day trying, with John Stone’s help, to convince McCrann that such a levy would be bad news for the Abbott government from more than one perspective. Terry, however, stuck to his guns.

The exchanges with him are available here. Some points are worth reiterating here:

  • In his Budget in reply address in 2013 Abbott said that under the Coalition nobody would be subject to an increase in their taxes. The exact quote is there;
  • The deficit tax indicates the government is shirking adequate reductions in spending when an additional cut of  $3bn would amount to a reduction in total estimated spending in 2014-15  of only 0.7%. According to today’s Australian, the estimated levy would produce less than McCrann estimated -only $2bn a year. The fact that Abbott also “promises” no tax cuts to offset bracket creep adds to concern that there will inadequate spending cuts.
  • Contrary to McCrann’s assessment, it is “conceivable” that an additional $3 bn should be obtainable by reducing assistance to those with incomes above poverty level.
  • To the extent that the Government has concern that spending cuts would have serious adverse effects on the economy, this Keynesian type analysis (Treasury inspired?) overlooks the boost in confidence likely to follow a convincing reduction in spending;
  • It was very likely that the Senate would not pass the deficit levy and the political row over it would have adverse effects on a polling position which has already been adversely affected by the amateurish handling of the budget outlook and what is needed to be done, particularly in regard to spending.

Today’s press (below, except for the AFR, which did not arrive on my doorstep) appears to confirm most  of the points I made to McCrann, although he has stuck to his guns and has not addressed a number of the points I made to him. This deficit levy proposal can now only be described as a first class cock up and it would not be surprising if it does not proceed.