Flood levy proposed – but is it necessary?

Economic issues

• The Prime Minister has proposed a levy on higher-income Australians to assist in meeting the damage bill from the east coast floods. The levy will apply in 2011/12 and will raise $1.8 billion.
• The estimated cost of the floods to the Federal Budget is estimated at $5.6 billion (over four years). The Government will make an upfront payment to Queensland of $2 billion.
• The cost to the Australian Government of rebuilding flood affected areas outside Queensland is estimated at $1 billion. Rebuilding flood affected areas in Queensland itself is estimated to cost $3.9 billion.
• The Government has announced a $5.6 billion funding and skilling package for flood rebuilding.
• Treasury’s preliminary estimate is that GDP growth in this financial year will be around half a percentage point lower due to the floods.

What does it all mean?

• If a levy had to be applied, this is the right levy for the times – modest in size, temporary, progressive and applying to those on higher incomes, rather than across the board. But while most people are unlikely to miss a couple of dollars a week, many will question why it has to be applied at all. The levy will raise just $1.8 billion, but at a time when families are facing pressure on budgets from higher food prices, rising petrol prices and hikes in utility, council and public transport charges. Consumers are already reluctant to spend and this is unlikely to change in the short term.
• While the government has estimated the budget cost of the floods at $5.6 billion, it has provided no detailed estimates of the infrastructure affected. In light of previous Government programs such as spending on school infrastructure and home insulation, there is value in the Government releasing more details of the infrastructure to be repaired.
• While there is a cost to the Federal Budget in repairing or replacing infrastructure, government revenues will also be boosted by the extra workers employed in the rebuilding work and GST revenues will be boosted by the spending on homes such as replacing carpets, curtains and kitchens. It is not known whether the government’s cost estimates have been made in gross or net terms.
• The Government has a Contingency Reserve. The reserve is budgeted at $2.4 billion in 2011/12. $3.1 billion in 2012/13 and $5.9 billion in 2013/14. The government hasn’t made it clear why the contingency reserve can’t be applied to meet the cost of the floods. While the reserve is generally applied for cost over-runs of projects, clearly it should be available for unforseen events like the floods.
• There is no economic imperative or urgency for the budget to be brought into surplus. Australia’s budget deficit and government debt levels are very low in relation to advanced and developing nations across the globe. The Government has made a commitment to move the budget back into surplus and it is determined to meet the goal despite the questionable justification. It would be a different story if Australia was at the top, rather than the bottom, of the global government debt leader-board.
• There have been some dubious and sensational estimates of the impact to the economy from the floods. The Government has set the record straight by its estimate of half a percent negative effect in the first half of 2011. However there is no estimate of the boost to activity in the second half of the year from the rebuilding. We had previously estimated the cost of the floods to the economy at $3-5 billion and see no reason to change the estimate.

The funding and skilling package for flood rebuilding

• A levy will be applied on those earning more than $50,000 in 2011/12, raising $1.8 billion.
• Six Queensland roads projects will be delayed by periods of one to three years. This will save $325 million in the Budget period.
• A number of projects in other states have also been identified where delays and reductions in Australian Government funding will save approximately $675 million.
• Spending on some funding programs will be scrapped, others capped or deferred. These include the Green Car Innovation Fund, Cleaner Car Rebate Scheme, the Carbon Capture and Storage Flagships and Solar Flagships,
  the Solar Hot Water Rebate, Green Start Program, Solar Homes and Communities Plan and the Global Carbon Capture and Storage Institute.
• Capping will be applied to some programs to limit their cost: the National Rental Affordability Scheme and the LPG Vehicle Scheme. And some lower priority education spending, where the desired outcome can be achieved
  through other programs, will be discontinued. This includes the Capital Development Pool and the Australian Learning and Teaching Council.
• The Building Better Regional Cities funding and Priority Regional Infrastructure Program funding will be redirected to flood rebuilding.
• There will be quicker approval for temporary skilled migrants (the 457 visa program) who work on flood rebuilding. There will be extra resources, assistance to employers and simpler processes to ensure a five day turnaround for ‘decision-ready’ applications for workers in a host of nominated occupations to work on rebuilding Queensland.
• There will be a doubling of the pilot of relocation assistance for people on income support and directing it to Queensland. Up to 4 000 eligible jobseekers who want to get a job helping out will now receive support to move to Queensland and make a difference on the ground.
• The Government says that there will be two dollars saved in spending cuts for every dollar raised through the temporary levy.

Details of the proposed levy

• Federal Treasury has provided details on the proposed flood levy.
• “The Government will apply a flood levy to help fund reconstruction in flood affected areas. The flood levy will apply to individual’s taxable income only in the 2011-12 financial year.”
• “A levy of 0.5 per cent will be applied on that part of an individual’s income between $50,001 and $100,000 and a levy of 1.0 per cent will be applied on that part of the taxpayer’s taxable income above $100,000. No levy is payable where the person has income of $50,000 or less.
• Someone on a wage of $60,000 a year will attract a levy payment of 96c a week. For someone on $100,000 a year, the levy payment is $4.81 a week.
• “Those people who have received an Australian Government Disaster Recovery Payment in relation to a flood event in 2010-11 will be exempt. Because not all affected people have yet made claims a precise number is not known. At this stage claims have been received for around 250,000 adults.”
• “Taxpayers will not have to do anything extra to pay the levy. People will make their levy payments through the tax taken out of their regular pay in the same way that people pay the Medicare levy. This will help prevent taxpayers from receiving a tax bill at the end of the financial year.”
• “The Treasury has estimated that the levy will raise $1.8 billion.”

What are the implications for interest rates and investors?

• The flood levy represents more challenging news for retailers and other consumer-focussed businesses. Given the good shape of Government finances, the need for a levy to help meet the cost of the floods must be questioned.
• The fact that the Government is cutting spending and applying a new levy on Australian consumers may reduce the need or urgency for the Reserve Bank to lift interest rates over the year.