What a pickle the federal government has got itself into over a deficit levy.
There are now no options that enhance its credibility: walking away would mean the damage done so far will have been for naught; instead, the government will look like it lacks spine. Proceeding with the levy will be a broken promise, for a Prime Minister who more than most politicians has made a virtue of keeping them.
But the levy is cack-handed in policy terms, not just political terms. There is no need for a rush back to surplus in the next two years, even assuming a levy is high enough to raise sufficient revenue to materially make a difference to the deficit. The likely consequence of a levy is a hit to consumer spending (with flow-on consequences for GST revenues for state governments) at a point when the economy should be accelerating back to trend growth on the back of more traditional sources of growth -- housing construction and consumer demand -- than we’ve seen in recent years.
Treasurer Joe Hockey is right in arguing Australia has a significant challenge on long-term fiscal sustainability. Fortunately, there are a number of options for pursuing this without a rise in personal income tax rates: reducing the staggering $29 billion a year (and rising) in incentives for superannuation saving, re-instituting the indexation of fuel excuse that the Howard government abandoned in a panic in 2001, and reducing family tax benefits payments to considerably lower levels -- there should be no reason why any household above average weekly earnings obtains such support. And Hockey should copy Peter Costello and direct the returns from asset sales to paying down debt, rather than blowing them on infrastructure investment.
What it shouldn’t be doing is returning personal income tax levels to where they were under Costello.