Listener: 9 May, 2011

Keywords: Macroeconomics & Money; Regulation & Taxation;

John Key has shown considerable ability responding to the moods of the New Zealand public. That’s why I’m astonished by his rejection of an earthquake levy, involving a relatively small tax on income over 10 or more years to pay off the costs incurred by the Christchurch earthquakes. Instead, it seems we’re going to pay for them by squeezing Government expenditure.

There is a case for doing this, but it is about our uncomfortable fiscal situation, the mounting external debt this is causing and the fear that at some stage the international lenders will treat us as they have treated Greece, Ireland and now Portugal.

Earthquake costs are on top of that. That means the Government is going to either fail to address the dire debt situation or have to cut spending even more.

Claims of easy “productivity gains” in the public sector are nonsensical. They take time and are incremental. A lot of this Government’s success is a result of the capability the previous administration developed among our bureaucrats. Ironic that: rather than celebrate its good luck, this Government proposes to destroy one of its strengths.

Of course, some cuts will be on whole programmes the Government does not think the electorate generally values (such as TVNZ 7). You may regret losing them, but presumably the Government thinks in each case the regretters are in a voting minority.

Some cuts won’t affect Government expenditure at all. Reductions in Working for Families, benefit entitlements, support for students and the KiwiSaver subsidy reduce the incomes of families, beneficiaries, students and savers. I leave you to decide whether each is a good thing. But reducing their income is a kind of additional tax, not a cut in the amount of resources the Government is using.

That makes the Government’s argument against an earthquake levy so strange. Certainly it is a tax and it would dampen the economy. So will cutting people’s incomes. But an earthquake levy on incomes falls on those with the ability to pay. Instead the Government is taxing the poor, weak and vulnerable. Is that fair? We are not arguing about what we should do about the quakes, but who should pay for their consequences.

Perhaps there is a political calculation – the Greens thought of the levy first – but why should the devil be left with the best tunes? The public feels deeply about the consequences of the earthquakes. The concern is broader than just those who are there, including those with family and friends in the city, or who have lived there, or who empathise with New Zealanders who have been hit hard. They would pay the levy – grudgingly, naturally, but holding a grudge against the devastation wrought – with a shrug that says, “There but for the grace of God go I.”

The Prime Minister has failed to articulate that response into national solidarity. Where are you, David Lange, when we need you? Key is trying to create national unity with the Rugby World Cup, even though about a million New Zealanders will be grumpy about the disruption it causes and the money the Government has lavished in a time of fiscal frugality. (It won’t contribute to an economic recovery; remember the America’s Cup?)

Key is an optimist. So are New Zealanders; we ought to be, given many of our ancestors sailed across thousands of miles of ocean from Hawaiki or Europe to a barely known destination.

But the optimism has to be grounded in reality. We are already in the fourth year of what is internationally known as the Great Recession. It has some years to go. Optimism is not enough; we need leadership that brings us together, not the sort that divides us by attacking the defenceless.

It is said that an earthquake levy would be unfair. Excuse me! Since when has charging for public collective goods by ability to pay been unfair; since when has charging the weak, poor and vulnerable been fair?