With the effective nationalisation of the banking system now accepted as necessary (Australia’s comprehensive guarantees amount to public assumption of the risks of ownership, and hopefully the fees to be paid by the banks will reflect this) attention has turned to the role of fiscal policy.

Getting fiscal policy right involves a delicate balancing act. On the one hand, there is the short-term need for stimulus. On the other hand, the combination of a large stimulus and a bailout/nationalisation package imply big deficits, which will have to be recouped in the future.

In the Australian context, the Opposition is calling for an immediate pension increase and the bringing forward of the next stage of tax cuts. That’s a plausible line, although other opportunities for stimulus through public expenditure need to be explored. But the obvious, though unstated, quid pro quo is that the ‘aspirational’ tax cuts proposed for the next Parliament should be taken off the table. It will take a long time to restore the budget balance after the kind of stimulus that is needed here.

A further implication of the crisis is that the idea of giving big tax incentives to high income earners, in the hope that this will stimulate productive innovation, has been discredited once again. The smart rich have already cashed in, and the average punter (along with those among the rich who hung on too long) has been left with the tab. Taxing the income gains of the top 10 per cent over recent decades will provide more than enough revenue to pay for the bailout in the long term.

For some rough arithmetic on this, let’s suppose that the bailout and stimulus cost 15 per cent of GDP. The share of pretax national income going to the top 10 per cent has increased by at least 5 percentage points and probably more, so taxing away half of that would raise 2.5 per cent of GDP or enough to recoup the cost (including interest) in 6-10 years.