Australia imposes new tax to fund flood recovery

Friday, 28 January 2011 00:01 -     - {{hitsCtrl.values.hits}}

CANBERRA, (Reuters) - Australia’s minority Labor government imposed a reconstruction tax and cut environmental spending on Thursday to help fund the recovery from this month’s devastating floods, and immediately ran into opposition from one of the parties keeping it in power.

The plan is likely to spark fiery debate in parliament when it reconvenes next month, with key Greens lawmakers angry over cuts to renewable energy programmes and independent MPs nervous about the impact on regional spending.

 But analysts say it is unlikely to put the government’s one-seat majority at risk.

 Gillard said the floods, which swamped thousands of homes, shut coal mines, ruined crops and washed away roads and rail lines, would crimp economic growth by half a percent in the fiscal year to June 30, though economists expect the rebuilding effort to spur growth in 2011-12.

 Economists have put the final bill from the flood damage at at least A$10 billion ($10 billion), with some estimates as much as double that.

 The tax and spending cuts could further hit sluggish consumer demand, they said, but could also help ease longer-term pressure for interest rate hikes.

 “With consumers already cautious, a new tax is not a positive -- it’s another headwind,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

 But Ong said it was right for fiscal policy to be kept tight, as spending on rebuilding would boost growth at a time when a trade and mining boom was already stretching the A$1.3 trillion ($1.3 trillion) economy’s spare capacity.

 “It takes some pressure off monetary policy to do all the work on restraining inflation,” said Ong. “Overall, we suspect the floods will turn out to be a net positive for the economy.”

  At least 35 people were killed in the floods across

Queensland, New South Wales and Victoria states, which followed record summer rains due to a La Nina weather pattern across the Pacific Ocean.

 Gillard’s plan is the first major test of her minority

government, which scraped back into office last year with a one seat buffer after August elections, backed by a sole Green MP and three independents in parliament’s lower house.

 “As I reflect on these floods and what has happened, I can’t escape the sadness,” she said in a speech to the National Press club. “None of us can.

 “But then I look forward and I know what needs to be done: investing in rebuilding, investing in future growth, managing demand, reforming for the future. That’s what we will do.”

 Gillard said the new income tax, to apply for 12 months from

July 2011, would raise A$1.8 billion and would be set at 0.5 percent on annual income above A$50,000 ($49,900) and 1 percent on income over A$100,000. Flood-stricken households are exempt.

 The national government would also curb spending on other areas to help patch up its budget, which faced flood costs of around A$5.6 billion, she said. The governments of flood-affected states will also contribute flood recovery funds.

 Gillard’s plan for a new tax has broad support from Greens and independent lawmakers, who support the government and give it its one-seat majority.

 But new cuts to a series of environmental programmes,

including rebates to install household solar power, angered the Greens Party, who will oppose some of the savings measures and want the government instead to defer a one-point cut in the company tax rate, due to start in July 2013.

 “It beggars belief that the government would choose to cut  climate change programmes ...  to fund disaster relief when such disasters will be made worse by climate change.

 Gillard could also face a fight with key rural independents when parliament resumed on February 8, after redirecting funding for some regional programmes to the flood recovery.

 However, independent Rob Oakshott said he did not think the cuts announced on Thursday broke his agreement to support Gillard’s government in return for spending on regional programmes.

 The opposition strongly opposes the floods tax, and said flood recovery progammes should be funded by budget cuts.

 The government still aims to wipe out its budget deficit by 2012-13.