A deficit tax: Now we really do have a Budget Emergency

Tony Abbott is floating a special deficit tax. If you earn over $80,000 you’ll be up for an extra $800 in tax next year.

Here’s four reasons it’s a bad idea, (and one reason it’s not so bad).

1. We do not have a Budget Emergency. Yet. Our deficits are small and our debt is manageable. What we do have is a looming structural trainwreck as health spending rises while labour force participation falls. A short-term Budget deficit tax fixes the non-problem, while ignoring the real problem.Image

2. Raising taxes while the economy is in poor shape won’t help the recovery. Australia’s growth has been meagre and our unemployment rate rising for most of the past few years (with a blip down in April’s numbers). Smart economics says to spend more and tax less when you’re trying to induce a recovery. This is Keynesianism.

3. Keeping the focus of the budget on the deficit (simple, easy to understand, irrelevant) misses the opportunity to make the budget about something important.

4. If we are so allergic to a deficit of a few billion, we may never borrow again. With Australia’s long-term government bond rate at 3.93 per cent, borrowing is cheap right now.  If we are ever to build any infrastructure round here, we need to borrow money. (Infrastructure costs a lot now and pays off in the long run, so if buy it using cash current generations subsidise later ones). Insufficient borrowing will mean the country comes crumbling down round our ears.

BUT

5. It’s hard to imagine Treasury proposing this idea to the government, except perhaps as a second-best alternative to slashing a lot of programs, and only if the government was hell-bent on returning to surplus immediately. Where you do discern the fingerprints of the department is in the progressive design of the tax, that would mainly slug high-income earners:

[It would] “cost earners on $80,000 at least $800 a year rising to an extra $8000 a year for those earning $400,000 a year.”

Hitting the high income earners may work for Mr Abbott politically too. He hurts only people who are likely to vote for him anyway, keeping western Sydney sweet. That means the people with the highest tendency to consumer their income won’t be hurt, so the economic effect of the tax will be more muted than if it were shared equally. 

Apparently there is a backbench rebellion against Mr Abbott’s paid parental leave scheme, which has s price tag of $5.5 billion, and is genuinely not a clever policy. I’ve written before about the economics of cutting it – reducing eligibility from incomes of $150,000 to $100,000 doesn’t make much of a saving – you’d need to be much bolder.