My two cents worth on the Gillard Government's response to the floods.
First, the levy itself is pretty much exactly what I (privately) suggested the government should do. Make it highly progressive and remove low-income earners and those affected by the floods. The state is the ultimate insurer of last resort in the event of natural disasters, and it makes sense for the federal government to be assisting with the reconstruction of public infrastructure that is not insurable with the private sector. The levy itself it utterly trivial, and I cannot really see how it is going to have any meaningful impact on consumption (at between 0.5% and 1% of higher-income households' disposable earnings). And people seem to be forgetting that the retail consumption recession we have seen of late is precisely what the RBA has been seeking to achieve: it does not want consumption, which accounts for nearly 60% of activity, booming at the same time as we embark on one of the biggest investment cycles in history.
Second, every economist I know of has been critical of the government's fiscal indiscipline and the ongoing size of the stimulus given the more rapid-than-expected global recovery, and the fact that we never got near the downturn Treasury expected. In short, the stimulus was sized for a worst-case economic scenario, which, in Australia's case, did not come close to materialising. Everyone I know argues that the deficit is putting upward pressure on interest rates. So the fact that the government has raised a tiny new tax, and deferred/reprioritised some spending (open question whether they can get the Greens to support such measures), is, I think, a clear step in the right direction. More specifically, the government is trying to reduce the inflationary consequences of the floods for fear of the influence they will have on monetary policy. This makes sense. Most market economists concluded today that the government's actions will indeed help staunch some of the inflationary bleeding that might otherwise have seeped into the economy.
Third, with the labour market close to fully employed, and population growth and immigration having slowed quite dramatically, we needed this downturn in the housing and household sectors to make room for the extraordinary private investment boom that is commencing as we speak. Indeed, with the US now forecast to experience very strong 3.5-4.0% real GDP growth in 2011 (contrary to many doomsayers' claims), we have the world's two largest economies undergoing synchronous upturns, which presents nontrivial upside risks for the global economy and Australia in particular. The truth is that the government should be doing more belt-tightening.
Finally, if you want the real proof in the pudding of the government's case, consider this: interest rate futures markets have rallied hard today in response to the package, materially reducing the probability of future rate hikes on the basis that the measures are anti-inflationary. Now most people would think that is a good thing (although the markets have arguably over-reached, as is their proclivity).
