There is a story doing the rounds this morning that “families could be hit with a debt tax to help pay off the budget deficit”.
All that such a debt tax imposed by the government to reduce governement debt and deficit would do is transfer household savings from the private sector (where savings fall and / or debt increases) to the government sector (where debt falls). $10 billion of revenue from the tax, for example, would reduce household savings by that amount whilst simultaneously reducing governemnt debt by that amount, less the red tape and administration costs of course.
The net effect on national savings, which is the thing that matters to all sensible macroeconomists, is a big fat zero.
The impact on economic growth would be clearly negative and equal to the amount of the tax taken out of the economy. At a time when the worrywarts at the RBA are concerned about the sustainability of the recent good economic news and are still not sure whether the unemployment rate has peaked, a new tax of this type would be concerning.
The debt tax is as good as an interest rate hike – or two.
Some have already compared the proposed debt tax with the Queensland flood levy, which is like comparing chalk with cheese. The flood levy was directed at funding the repair of infrastructure damaged or destroyed during a series of cyclones and floods. The money was recycled into the economy and was neutral for growth.
One final point to note on this concept relatives to the privatisation of government assets. While there are some potential benefits that flow to the firm being privatised, the net effect of the finances of Australia are generally zero. All that happens when, say, Medibank Private is privatised, is a transfer of ownership of the company from the government sector to the private sectors. More debt for the private sector who buys Medicare Private which is offset by the reduction in government debt, less administration costs and red tape again.
A debt reduction tax delivers the same zero benefit to the economy.
In the mean time, private sector debt in Australia is currently $2.23 trillion. The government doesn’t seemed too worried about this probably because private sector debt has been a vital foundation in Australia’s incredible growth record and record high prosperity. The same could be argued with government debt, especially with reference to Australia’s economic performance during the recent banking and financial crisis that threw the world into a deep recession.
