Australia's new tax to fund flood recovery
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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 programs 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.
Prime Minister Julia 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 2011-2012.
Economists have put the final bill from the flood damage at least A$10 billion ($9.94 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 ($1.29 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.
