We’ll all be rooned by the Great Big New Tax Levy – it will put pressure on the retail sector, it’s a mateship tax, it will hit demand at a vulnerable time, first borns will die etc etc. Those were the lines earlier today from a variety of usual suspects on the governments now proposed $1.8 billion flood levy.

That’s all very good and well, but this is what 1.8 billion looks like in the context of the wider economy.

levy2

It makes you wonder why the government even bothered. Treasury’s revenue estimates are usually out by more than that every year – so don’t be surprised if, ultimately, the levy turns out to have not been needed to bring the budget back into surplus in 2012/13.

On the funny side, such a development might make for an amusing mea culpa down the track, with a refund of the levy being an option for the 2012 budget (partially similar to the way the East Timor Levy was proposed but never triggered, as eventually it wasn’t needed). Though such a refund would bring with it an interesting problem best put by @robcorr in response to the refund suggestion:

The politics of that aren’t great. “Here: free cash for everyone except flood victims and low income earners!”

He’s spot on! You can just picture it now 😛

So saying, many words will be written about about the importance/depravity (choose your side) of this 1.8 billion tax. Like most things in politics, the hype probably won’t match the reality. This is 1.8 billion dollars in an economy over 1 trillion dollars wide. Take the inevitable silliness from both sides with a little perspective and a grain of salt.

The real story of today is that the cost to the federal budget of rebuilding from the floods is much smaller than previously guessed at, with the the government putting it at 5.6 billion – let’s call it 5 to 6 billion. The broader economy too is projected to power along. Even though GDP growth is projected to fall from 3.25% to around 2.75% as a result of the flood, expect that to be a conservative projection where the GDP hit is only temporary.

We usually underestimate the growth effects of our investment surges – such as we’ve done for, say, just about every one we’ve ever had, including the most recent 2004-2007 surge. We are heading into a large investment surge over the next few years – with much of it already starting to be deployed.

So while the government is trying to get on the right side of the macroeconomic textbook ledger, at least in terms of not exacerbating existing and emerging capacity constraints (the ones that are giving us interest rate rises) by not borrowing to fund reconstruction, but reorganising existing funding and pulling 1.8 billion out of the economy and redeploying it – it seems to be more for the purposes of creating a political argument considering the actual size of the numbers involved.

But that’s good news – the floods arent costing nearly as much as some may have earlier feared. An Australia where arguments are had over small numbers for the reconstruction bill is a luxury compared to an Australia where we were arguing about reconstruction costs much, much larger.

UPDATE: Christopher Joye over at The Drum has a thoughtful piece on the economics of it all that’s worth reading