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Economic Debate Christchurch Earthquake Funding Dilemma

Max Bowden's BusinessSense: Economic Debate Christchurch Earthquake Funding Dilemma

It's been a tough week for the Govt.

First its South Canterbury Finance bail-out goes way over budget, and then it gets hit with another potentially huge bill with AMI Insurance needing help to meet its obligations as a result of Christchurch's two major earthquakes.

The interesting thing is how stubborn the Govt is being about finding ways to pay for all this. It is steadfastly against raising the money through any form of taxation, preferring the old Tory right ideological remedies of cutting spending and selling assets.

The IMF will be happy, but NZers are not strongly opposed to a levy - a tax increase by another name - to help fill the funding void. Labour says Christchurch's earthquake will be used as a scapegoat to push through National's "old world" economic agenda. Will this be the case?

The Trans Tasman Political Week's Economic Debate has been looking at this issue, and does a great job of outlining the pros and cons of the various options open to the Govt.

"Economic Debate - How To Rebuild A City A surprisingly generous 40% of taxpayers surveyed by UMR flagged their willingness to temporarily pay more taxes to help rebuild Christchurch.

They favour an earthquake levy on those of us with incomes above $48,000 rather than increased Crown debt or big spending cuts. 29% would prefer spending cuts, 22% preferred more Govt borrowing.

But the PM is sticking to his budgetary guns and eschews a levy, or tax increases, to raise the several billion dollars needed, among other reasons because he doubts taxpayers appreciate the extra impost would have to be paid for 10 to 15 years.

He may be right, but they (the taxpayers) should not be thought totally ignorant about the implications of the remaining options.

Finance Minister Bill English has flagged intentions to raise debt over the next year or so to share the cost with future taxpayers. Shifting payment to the future makes sense because we are building for the future.

But this will worsen a budget deficit already at troubling levels and because NZ is seriously indebted it risks a credit rate downgrading.

Govt waste should be eliminated and greater efficiencies encouraged to keep the deficit in check, but excessive spending cuts risk a repetition of the early 1990s experience, when fiscal austerity drove economic activity down, reduced Govt revenue, lifted unemployment payments and pushed the Govt books further into deficit.

Moreover, selected groups will be called on to share the burden - the beneficiaries of spending on culture and heritage, law and order and recreational services, for example, university students, working-for-families and social security beneficiaries, and KiwiSavers.

Emphasising the burden of the budget deficit and the risks of borrowing, the NZ Herald says a responsible Govt should be considering a tax levy for a limited term.

Economist Brian Easton agrees. He reckons costs of around $5bn spread across 10 years amounts to an annual levy of $500m (less than $5 per taxpayer a week, even allowing for inevitable overruns and the costs of servicing the debt).

This would be around 0.5% on the existing tax rates. More important, an effect of the levy would be to shift the burden from selected groups to the community generally.

Easton supports fiscal consolidation to get the Govt and country living within their means. But more critically, paying for a task so massive should be spread across all citizens and across all possible policy options."

The Govt is taking the least radical path over this issue much as it has done over other economic matters throughout its first term in office. (eg the 2025 Taskforce, Welfare Working Group and Tax Working Group recommendations.)

There seems little doubt it will win this year's election. Hopefully it will see any new mandate not as a message the country wants the same as it got over the past three years, but the new ideas it promised when John Key was first elected to office.

Once the earthquake rebuild is truly underway, the boost to the economy will hopefully enable some clearer thinking in economic terms.

Max Bowden Publisher/Editor In Chief The Main Report Business Week

ENDS

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