Australia plans tax, cuts to pay for floods

Friday, January 28, 2011

CANBERRA, Australia -- Australia wants to tax those not affected by massive flooding and cut spending to pay the more than $5 billion bill it is anticipating after weeks of rain swamped the country's third-largest city and forced thousands from their homes.

With its tax proposal Thursday, the government hopes to avoid borrowing to pay for rebuilding after what could prove to the the country's costliest disaster -- a decision some economists and business leaders have called into question.

Prime Minister Julia Gillard announced that the temporary tax would apply to Australians on above-average incomes and would exclude those who were affected by the floods. The levy -- 0.5 percent on incomes between $50,001 and $100,000, and a 1 percent on taxable incomes above that -- is expected to raise $1.8 billion.

A vast inland sea of floodwaters continued creeping across southeastern Australia on Thursday, inundating farms and houses. Dozens of homes were swamped this week.

The flooding has claimed 35 lives, damaged or destroyed 30,000 homes and businesses and caused at least $3 billion in damage to crops and lost coal exports. Brisbane, the country's third-largest city and the capital of hard-hit Queensland state, was under water for days.

Initial estimates of the overall damage plus the cost of emergency grants to flood-affected communities for the federal government is $5.6 billion and likely to rise, Gillard said. The federal government is to pay 75 percent of the cost of rebuilding infrastructure such as roads and ports, while state and local governments will pay 25 percent.

The federal government plans to cut spending in other areas including clean energy industry incentives to make up the remainder of the bill for infrastructure.

"In time, it may prove to be the most expensive natural disaster our nation has ever seen," Gillard told the National Press Club.

She said the government expected the floods to shave half a percentage point from Australia's gross domestic product, which the government predicted in November would grow by 3.25 percent in the fiscal year ending June 30.

The legislation is to be introduced to Parliament next month. The main opposition party opposes it, but the measure seems likely to pass because Gillard's Labor Party commands a majority in the House of Representatives with the support of independent and Green lawmakers.

Gillard, whose government has vowed to make Australia one of the first developed countries to return its annual budget to surplus two years after the global economic crisis, has dismissed the prospect of borrowing to pay for the flooding damage.

Some economists and business leaders say she should reconsider.

Warwick McKibbon, a central bank director, estimated the cost of reconstruction could be between $10 billion and $20 billion and said the government should keep the budget in deficit for longer to pay that.

"I don't think any great harm would have been done had the government simply allowed the deficit to be larger or the return to surplus be slightly delayed from a schedule that was drawn up well before this most extraordinary disaster," Saul Eslake, an economist with the Grattan Institute think tank, told Australian Broadcasting Corp. radio.

Western Australia state Premier Colin Barnett, one of only two state leaders who is not a member of Gillard's party, said most Australians would happily pay an extra tax to rebuild Queensland, the worst-affected state in the east.

"I believe most Australians -- most West Australians -- are willing to contribute a little bit more to help Queensland get back to its feet," Barnett said. "So I think that is appropriate."

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