Thursday, January 27, 2011

Increasing taxes: still not the answer...

As I unfortunately predicted in my blog last week, the federal government has proposed the introduction of a flood levy on taxpayers to cover the costs of rebuilding ravaged infrastructure in flood affected communities, in an effort to keep its promise to return the budget to surplus by 2012-13.

As I alluded to last week, the most effective way to meet Australia’s increased spending requirements is to defer the date of returning the budget to surplus – it is important to have a real-time sense of perspective about budget deficits and public debt. When successive governments have been trying to reduce the tax burden on Australians over the last decade, the last thing we need is a new levy.

Australia’s financial and risk management strategy should involve controlling expenditure and having the capacity to fund unexpected events or emergencies. While the flood crisis was an unexpected natural disaster on a massive scale, it was not unpredictable.

The question Australians need to ask themselves is: what can we do to ensure this country is able to deal with crises of this scale in the future? Will the flood levy set a precedent for future ‘one-off’ taxes?

The Institute has also published a media release on this issue.

Thursday, January 20, 2011

Forget about tax increases – send in the ‘razor gang’ instead

As the full extent of the recent flood crisis across Australia begins to emerge, attention is turning to the extent and cost of the long-term devastation and ruin.

Estimates vary, but even conservative economists are suggesting that the floods could dampen Australia’s GDP growth by a full percentage point in the year ahead. If that’s correct, it would have a significant impact on tax revenue collections because the profits of many businesses will be negatively impacted in the short-term. On top of that, it is estimated that the floods could cost the government a minimum of $5 billion over the next three or four years. Some are even suggesting the final number could be as much as $20 billion.

In light of this new and unexpected financial burden, calls are increasing for the federal government to revisit its plan to return the budget to surplus in the 2012-13 fiscal year, and to push that timetable out so that the immediate focus remains on rebuilding communities and public infrastructure. Some knee-jerk responses that have already been put forward include increasing the current 1.5% Medicare levy. While that may be an easy option for the government, I don’t think that’s the right policy answer.

I suggest a more prudent approach would be to review all of the major federal government agencies’ spending programs with the objective of finding efficiency gains and expenditure cuts. When this kind of exercise is conducted properly, big dollar savings can always be found, and that will go a long way to plugging the financial hole.

Sending in the ‘razor gang’ to find cost savings is always very difficult to do, but in challenging times like these, it’s the right answer. Following the personal loss and devastation facing communities across the country, the last thing Australia needs is to increase the tax burden on taxpayers at a time when we are trying to move in the exact opposite direction.