The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

30 January 2011

NO.002

Treasurer's Economic Note

Like me, I know a lot of readers of this note will be really proud to see Australians pulling together in the face of adversity and doing whatever they can to help those affected by the floods. We saw more examples of businesses big and small digging deep to help those in need throughout the week with generous donations to the flood relief appeals and offers of in-kind assistance. On Monday I attended the first meeting of the Prime Minister's Business Taskforce with Minister Bill Shorten and Queensland Treasurer Andrew Fraser, where we had a really useful discussion on a range of things including a better process for coordinating in-kind donations. Yesterday I saw first-hand the big impact that in-kind donations from businesses are making on the ground when I visited the flood recovery centre in Goodna in Ipswich with local MP Bernie Ripoll, where over 600 homes were flooded. The union movement has also answered the call, with more than half a million dollars in donations as well as a great deal of donated time and expertise. As I said in my opinion piece on Australia Day, the immediate instinct of the Australian people as the waters rose around them was to stick together, and this quality will serve us well as we meet the challenges of the future. There is a lot of hard work ahead, and just like the broader community we are getting in and doing what needs to be done to rebuild after the floods.

Rebuilding after the Floods

The recovery effort throws up significant challenges for the budget, with our initial estimates putting the Commonwealth contribution at around $5.6 billion. The Prime Minister announced our response to the national challenge of rebuilding flood-affected regions in a speech to the National Press Club on Thursday. Our response strikes the right balance in funding the recovery and reconstruction effort, with two-thirds of the cost to be delivered through spending cuts and the remaining one-third to be delivered through a modest temporary levy. We will cut spending by $2.8 billion by abolishing the Green Car Innovation Fund and the Cleaner Car Rebate Scheme and cutting back other green programs and industry assistance. We will also defer infrastructure projects worth $1 billion to free up funds and skilled workers at a time of skilled labour shortages around the country.

Every cent raised through these measures will go directly to flood-affected regions across Australia. We've already agreed to make an advance payment of $2 billion to Queensland to ensure recovery and rebuilding can start as soon as possible, and to provide certainty to the Queensland Government and Queensland local authorities.

Temporary Flood Levy

While most of the costs will be met from savings, the Government has taken the difficult decision to fund about a third of the costs through a modest temporary levy. The Government will fund $2 of the costs through savings, for every $1 raised in the levy. Historically, temporary levies have been a reasonable part of government responses to unexpected events. We saw the Howard Government impose six levies during its time, including the gun buyback levy after the Port Arthur massacre, and proposed two others. Asking the broader Australian community to chip in is a commonsense policy approach that reflects just how battered Queensland has been by these terrible floods and the size and scope of what is required.

We designed the levy so that about half of taxpayers will not have to pay any levy, and over 60 per cent will pay less than $1 a week. To help people understand whether they will have to pay any levy and if so how much, we've set up a flood levy web resource with fact sheets and a calculator to estimate how much a person's weekly liability will be. It explains that the levy will only apply to individuals in 2011-12, and will be 0.5 per cent of taxable income over $50,000 and 1 per cent of taxable income over $100,000. For a person earning $60,000, their temporary levy of $0.96 per week will be less than 4 per cent of the $25.96 in ongoing weekly tax cuts they have enjoyed under this government. Going up the income scale, a person on $80,000 will pay $2.88 per week in temporary levy, or about 10 per cent of their $29.81 weekly tax cut, and a person earning $100,000 will pay $4.81 per week in temporary levy, or about 12 per cent of their $41.35 weekly tax cut.

Infrastructure

The task of rebuilding Queensland will be large, with the vast majority of the costs going towards rebuilding infrastructure. This infrastructure spending will be occurring at the same time as a large number of private-sector construction projects that are already underway. Many of these projects compete for the same resources, especially labour and skills, which is why the Government took the difficult decision to defer $1 billion of infrastructure projects. This will help ease pressure on Queensland's capacity and ensure priority projects get rebuilt first. Since 2007, we have more than doubled Commonwealth investment in transport infrastructure, expanding the productive capacity of our economy and reducing bottlenecks. Restarting affected projects will be a high priority once the reconstruction work is undertaken.

Skills

As the rebuilding work gets underway, demand for skilled workers and labour in Queensland is likely to rise. That is why the Prime Minister announced two new measures to assist employers find the workers they need. The first is a doubling in the size of the Connecting People with Jobs relocation assistance pilot from 2,000 places to 4,000. This program helps unemployed Australians to relocate to take up a job, providing up to $3,000 for singles and $6,000 for families. This is a nationwide program, but its primary focus will be to assist eligible Australians to move to flood-affected areas to take up a job. The Government will also fast-track processing of employer-sponsored temporary visas (457 visas), to help employers involved in flood reconstruction work. A special team within the Department of Immigration and Citizenship will deliver visas within five working days, provided all required information including supporting evidence is provided.

Economic Impact

In last week's note I highlighted that the economic impact of the recent floods was going to be of an unprecedented magnitude – larger than the costs of any other natural disaster in our memory. On Friday I delivered a speech at the CEO Institute Annual Conference in Brisbane that was intended to provide a bit more clarity around some of the expected costs to industry and effects on the broader economy. While it is still early days and the numbers are only preliminary, Treasury estimates that the floods will reduce GDP growth by around ½ percentage point in 2010-11. Several billion dollars are likely to come from lost coal production – something in the order of 15 million tonnes – and we're looking at some pretty significant numbers right across the board. In particular, it's estimated that the agricultural sector could face losses around $1 billion, and damages to tourism somewhere near the $300 million mark. For remaining industries – such as manufacturing, retail and transport – the bill could stack up to another half a billion dollars.

As I also flagged in my speech, we also have a clearer sense around how the impact of the floods will feed into prices. Given that the floods wiped out vast stretches of Queensland's farm land, we're expecting a spike in fruit and vegetable prices – which will unfortunately be felt by families at the supermarket checkout. Based on Treasury's numbers, CPI inflation is expected to increase by ¼ percentage point in the March quarter.

For now, we can take some comfort in the fact that inflation remains contained. The consumer price index figures released on Tuesday showed that underlying inflation was 2.2 per cent through the year to the December quarter – the lowest rate since September 2000. Headline inflation also moderated to 2.7 per cent through the year to the December quarter 2010. While we saw rises in some components such as food (partly due to bad weather conditions before the floods hit), prices were largely subdued, with the strength of the dollar dampening the cost of consumer items like clothing and footwear. While this result was lower than anticipated, many Australians will understand the next quarter will show a temporary inflation spike as the full impact of the floods feeds through.

Conclusion

The recent floods really are a defining moment for our country. The unprecedented economic damage demands an extraordinary response, and we've taken the difficult decisions that are required to rebuild Queensland while keeping the budget strong. I know Australians have already given generously to help those individuals and families doing it tough, with over $180 million in donations to the Queensland Premier's Flood Relief Appeal. But with the recovery and reconstruction bill estimated to be $5.6 billion, the only responsible course of action was to introduce a temporary levy in combination with spending cuts. I know no one ever likes to hand over more of their hard-earned money to the government, but I can't think of a better cause to raise funds for than rebuilding the communities and infrastructure that were left devastated by the floods.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 30 January 2011

www.treasurer.gov.au