Fallow on paying for the quake

March 4th, 2011 at 10:00 am by David Farrar

writes:

Key is right to be dismissive of the idea of an ad hoc tax akin to the Australian flood levy.

If levied on the same basis – half a cent in the dollar of income for those earning between $50,000 and $100,000 or 1c for those earning above $100,000 – a back-of-the-envelope calculation indicates it would bring in a bit less than $500 million. About half would come from those earning between $50,000 and $100,000.

There is an opportunity cost to such an impost. It is money they cannot spend on consumption or investment elsewhere in the economy.

The economy started this year without a whole lot of momentum.

Export prices are at all-time highs, true, but many farmers are using the money to pay down debt and the flipside of the commodity boom is more and more of people’s incomes is soaked up by such necessities as food and fuel.

For firms chasing the consumer’s discretionary dollar an ad hoc levy is the last thing they need.

I totally agree. Putting taxes up when you are on the verge of a recession is daft.

As for calls for cuts to programmes like Working for Families or student loans, the case for such policy changes is no better or worse than it was before the .

They should be considered on their long-term merits. They should not be trundled through under cover of an all-purpose excuse, the cost of Canterbury’s misfortune.

I also agree. An inctreased abatement rate for should occur because National doesn’t believe in welfare to relatively wealthy families, not because of the earthquake. The earthquake may prove to be a catalyst for considering the issue, but any change should be subject to an electoral mandate in November.

The response of both the previous Government and the present one to the global financial crisis and accompanying recession was to loosen fiscal policy.

They cut taxes and they let the automatic stabilisers work. As revenue took a hit and more people landed in the social safety net, operating surpluses turned to deficits and public debt rose (from a very low base).

They let the Crown’s balance sheet take the strain. It was the appropriate policy then and it is again.

This is a one off shock. The balance sheet is the appropriate place to take the strain, so long as the level of debt is not so great that the interest on the debt leads to structural deficits – it there is still a credible path back into surplus.

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16 Responses to “Fallow on paying for the quake”

  1. Manolo (13,746 comments) says:

    WFF must go because we cannot afford that middle-class welfare bribe.
    C’mon Mr. Key, be brave and make that call. For once show some metal in your spine!

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  2. malcolm (1,952 comments) says:

    What are the significant costs to the government from this earthquake? I understand that tax revenue will drop and welfare costs will increase, but are the government liable for some massive rebuild expenses? Where was the insurance? I’m rather fond of the idea of insurance and I would hate to see the taxpayers of NZ undermining that marvellous concept by paying out where things were under-insured.

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  3. Lance (2,654 comments) says:

    So whats the chances of NZ digging deep to pay for Chch to be rebuild only for it all to be shaken down again in the not too distant future? And again, and again and again?

    It’s a serious issue if we can’t afford that.

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  4. jackp (668 comments) says:

    “They cut taxes and they let the automatic stabilisers work.”

    This is misleading because the wealthy got a good break, the middle to low income earners had their taxes increased through other means. This is where Key failed. It is called bait and switch. Key is good at it.

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  5. YesWeDid (1,048 comments) says:

    Malcolm – most reports say there is a $5B shortfall between what is covered by EQC and insurance ($20B total cost, $15B from insurance/EQC) etc for the damage caused by both of the CHCH earthquakes.

    I can’t comment if that is because of ‘under insurance’, possibly, but more likely the cost is for infrastructure that has been damaged and not covered, or not totally covered by various insurances.

    There has been a massive amount of damage to roads and bridges in CHCH and massive damage underground to drains, electrical cables etc. Most of this damage will just be patched up to get it working but it will take 5-10 years to fix it all properly.

    That is on top of re-building something like 6000 homes and maybe 500 buildings in the CBD that have been destroyed.

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  6. XChequer (298 comments) says:

    Can anyone give me a cogent answer for why Government Bonds should not be issued? Seems a no brainer to me

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  7. Chuck Bird (4,880 comments) says:

    Would anyone know if the tax or levy only applies on the amount over 50 or 100k and not on the whole income? If the later it would be ridiculous as some on $50,001 would end up with a lot less than someone on $49,999.

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  8. side show bob (3,660 comments) says:

    “Export prices are at an all time high”, true but if the country is relying on the agriculture sector to bail it out they may be disappointed. Most farmers I know are servicing higher debt levels due to rising costs and large bank debt. If export prices continue in the same vain and remain high then the country will reap the rewards. Unfortunately history has shown us that commodity prices dive just as quick as they rise. But given the ever raising food prices throughout the world our future looks a lot brighter. Having sad that it would be a brave government to rely solely on this alone to save our butts. I agree with Manolo but WFF should only be the start, the real problem lies with government, it’s bloated, self serving and is like a ball and chain holding down real growth. Government has to sort government before we can get into second gear.

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  9. malcolm (1,952 comments) says:

    YesWeDid, you’re having the same trouble as me. Where is this massive amount of infrastructure which wasn’t insured? Are you suggesting that the government is going to pay out for under-insured private houses and commercial buildings? Or under-insured private power and gas pipes? I sincerely hope not.

    So whats the chances of NZ digging deep to pay for Chch to be rebuild only for it all to be shaken down again in the not too distant future? And again, and again and again?

    Pretty low I would say. Infact the risk of a large earthquake in Chch might now be lower than in other parts of NZ. Also new commercial builders will be better built. Plenty of buildings in Chch have no damage.

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  10. JeffW (326 comments) says:

    For the sake of our medium term prosperity (and I personally believe social stability), the role of the state needs to be cut back and welfare significantly reduced. The earthquake allows the opportunity to reconsider government priorities, perhaps without the MSM making such re-prioritisation impossible.

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  11. malcolm (1,952 comments) says:

    Can anyone give me a cogent answer for why Government Bonds should not be issued? Seems a no brainer to me

    I agree. I can only imagine it’s because the government knows that NZ has been sliding down the socialism slope for so long that hardly anyone understands what a bond is.

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  12. YesWeDid (1,048 comments) says:

    Lance – it seems unlikely that we will get a 3rd major damaging shock here in CHCH. The 22nd February earthquake was predicted by GNS based on the pattern of shocks from data from previous earthquakes. After the Napier earthquake there was also a major aftershock, 10 days after the first major earthquake. GNS have been saying CHCH could experience a major aftershock of up to magnitude 6 for quite sometime, however after nearly 6 months from the initial earthquake the probability of this happening had reduced to 4%.

    From here the prediction is that the aftershocks will die down and things will return to normal.

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  13. Rick Rowling (813 comments) says:

    Lance – also we’d be rebuilding to the latest code – Christchurch’s CBD was full of old brick buildings that weren’t even close to code. So the rebuild city will be less inclined to fall down.

    Also bear in mind that, unlike Wellington, seismic strength wasn’t front of mind in Christchurch, because everyone knew that the place that gets earthquakes is Wellington & Hawkes Bay.

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  14. Rick Rowling (813 comments) says:

    Fully agree with the idea of Gov’t earthquake bonds.

    A quick issue would play on New Zealanders’ “what can I do to help” feelings at the moment, would be a safe investment, could increase average savings, and would reduce our national overseas debt.

    Win win win?

    /not a financial dude

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  15. JeffW (326 comments) says:

    XChequer, it is because the govt is already issuing around $300 million in bonds every week.

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  16. Caleb (479 comments) says:

    i dont understand the costs at all.

    20bn is a huge amount of money.

    rebuilding 500 commercial buildings and 6000 residential houses… 1bn

    infrastructure..?

    its a shitload of money… 350000 people x $50k each…

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