Sunday Star Times: 3 April, 2011.

Keywords: Macroeconomics & Money;

The government may come to regret its decision not to impose an earthquake levy on taxable income. It says the public is not interested. That is not the sense I have.

New Zealanders are dismayed by the devastation in Christchurch. There is a widespread desire that its costs should be shared. If the total costs are around $5 billion, and we spread those across 10 years, that represents an annual levy of $500 million or less than $5 per taxpayer a week, even if we allow for the inevitable overruns and the costs of servicing the debt. That would be about half a percent on the existing tax rates, not a huge level because the burden is spread across a decade, and across all of us.

We cannot avoid the burden. The issue is how it will be funded – who will bear its cost? Fiscal policy is rarely transparent, but the effect of the levy would be to shift the burden from selected groups to the community.

We do not know exactly who the government intends to carry the cost of the earthquake – that will be detailed in its annual budget on May 19. But there are clues. Does it really make sense to expect the burden to be heavier for university students paying more for their education, for families who will lose their working-for-families entitlements, for social security beneficiaries, for KiwiSavers, and for those who value government services such as culture and heritage, law and order, the environment, infrastructure, and recreation?

Last week the minister of health announced that all our hospitals will have their resources cut to make up for Christchurch Hospital’s losses; no doubt the same is happening in education.

Let me make it clear that I still support fiscal consolidation to get the government and country living within their means.

There is also some spending which needs to be improved, although genuine gains will come from the steady application of efficiency principles rather than hasty slash and burn. Sure, there are spending programmes this government does not think are important and will abandon. That is what we voted for in 2008. But these moves will not find all the $600-$800m they are proposing to cut.

Am I not suggesting further government borrowing? No more than the government seems to be planning. The difference is that an earthquake levy goes into a fund, perhaps managed by independent commissioners, which disburses costs as they occur and borrows to even out the spending surges.

That says very clearly to our overseas creditors: “We have had a once-in-80-years disaster, which we are addressing in a prudent and practical way. Look through the earthquake reconstruction costs and see the government deficit coming down, and soon. You know it is crazy to cut expenditures in the short term to cope with such occasional crises. Fiscal consolidation goes on.”

More important, an earthquake levy means the community is supporting the reconstruction on the basis of ability to pay, instead of at the expense of those vulnerable to the government’s spending knife. Without one, we are sacrificing national unity based on compassion and concern, and replacing it with divisiveness. The cost to the nation will outweigh any politically expedient gains.