RBA’s McKibbin Urges Australia to End Surplus ‘Fetish’

Australia’s government should end its “fetish” for avoiding budget deficits and borrow to pay for flood damage rather than impose a one-time levy on taxpayers, said Warwick McKibbin, a member of the central bank’s board.

“Borrowing is a far better strategy,” McKibbin, a professor at Australian National University, said today in an interview on Bloomberg Television in Canberra. “This is a classic example of where a government should borrow. We have room to run deficits in the short term when needed for these sorts of disasters.”

McKibbin was responding to Prime Minister Julia Gillard’s announcement yesterday of a levy to help pay for reconstruction, raising about A$1.8 billion ($1.78 billion). Under the proposal, an extra 0.5 percent will be taxed on income from A$50,001 to A$100,000 and 1 percent on taxable income above A$100,000.

Treasurer Wayne Swan, whose office appoints RBA board members, called McKibbin’s remarks “silly.”

“Mr. McKibbin doesn’t speak for the RBA board at all,” Swan told reporters after a speech in Brisbane, when asked about the professor’s remarks. “Mr. McKibbin was making commentary on the economy last year which is completely inconsistent with his commentary on the economy this year, so I don’t take those sort of silly comments seriously.”

Expiring Term

McKibbin has been on the RBA’s board since 2001 and his term is scheduled to expire in July, according to the central bank’s website.

In his speech, Swan called borrowing to fund the reconstruction “the soft option.”

Floods in the northeastern state of Queensland in the past two months killed as many as 32 people, affected about 30,000 properties, shut coal mines, cut rail lines and damaged crops. Economists estimate it may cost A$20 billion in repairs and rebuilding after the flooding that also hit Victoria and New South Wales states.

The rebuilding costs jeopardized the government’s goal of meeting a November forecast for an A$3.1 billion surplus in the year ending June 30, 2013. Throughout the disaster, Gillard has repeated a pledge to eliminate the deficit by that time.

Such a promise is “unfortunate,” McKibbin said. While he praised the part of Gillard’s plan to ease migration, he said politicians shouldn’t be so wedded to making good on budget targets when disasters happen.

Political ‘Fetish’

“Both sides of politics have a fetish about not running deficits,” he said. “That is a good policy but you can’t be unconditional.”

The damage probably will amount to A$10 billion to A$20 billion, or about 1 percent of gross domestic product, McKibbin said. The RBA’s board meets to decide interest-rate policy on Feb. 1, and all 25 economists surveyed by Bloomberg news predicted no change in the overnight cash rate target.

Gillard said the government will also save A$2.8 billion by cutting climate control measures and limiting rent assistance, and A$1 billion through delaying infrastructure projects. It will speed up processing for skilled labor migrants to help with the rebuilding, she said.

“The philosophy should be that you pay for it in the most efficient way possible,” McKibbin said. “You spread it over many future years and so the cost per person is far less and the politics become more diluted.”

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