Levy may help Government avoid debt limit increase

The Gillard Government must have known its flood levy would be hugely unpopular. The only plausible explanation for the levy is that the Government wants to avoid another debate about its debt limit, currently at $200 billion, as per the special circumstances provision (section 5A) of the Commonwealth Inscribed Stock Act 1911.

We won’t know for sure if this is correct until we get the Budget papers in May, but it’s possible the levy will keep the Government’s outstanding stock of Treasury Bonds at less than $200 billion, meaning it won’t have to go to Parliament to raise the debt limit again.

The Government no doubt remembers the bitter battle with the Turnbull-led Opposition in February 2009 (after the second stimulus package) over the raising of the debt limit from $75 billion to $200 billion. By introducing a levy, the Government is choosing to take some short-term political pain to avoid a potentially protracted debate about debt in the lead up to the next election, which is due by mid-2013.

In other flood-related news, Treasurer Wayne Swan gave an informative speech today outlining the likely economic costs of the floods:

The impact of the floods on our patchwork economy

Also, Queensland Treasurer Andrew Fraser released his mid-year budget update. From the Government’s budget website:

The Mid Year Fiscal and Economic Review 2010-11 outlines the financial cost of the floods at $5 billion with almost 2 percentage points taken off economic growth as a result of this disaster.

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