The Prime Minister has switched the Government’s campaign for a flood recovery levy from a fiscal to an economic focus, arguing it is critical to ensuring the recovery effort doesn’t drive inflation and skill shortages as rebuilding infrastructure competes with a booming economy.

Speaking at the National Press Club, Ms Gillard revealed the expected cost of rebuilding after the floods will be $5.6b, including just under $4b in Queensland. The cost will be met by a combination of spending cuts and a new levy on incomes above $50,000 pa, with the latter meeting around a third, and spending cuts the remainder.

The Prime Minister was clearly keen to shift the Government’s rhetorical emphasis away from its fixation with achieving a surplus in 2012-13, which has started to attract adverse commentary both from business and from economists, to justifying the levy by saying it was needed to “take some demand out of the economy” while the recovery effort added to demand – although in broad terms, reducing demand can be achieved either by reducing spending or by raising taxes.

The spending cuts include a slate of carbon abatement programs that the Prime Minister said would no longer be necessary because of her commitment to a carbon price by 2012. While her logic is impeccable – Ross Garnaut argued the same thing in his climate change review – it remains to be seen what sort of carbon price model this Government can deliver in cooperation with the Greens and the independents, and whether it will be effective.

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However, this enables the Government to dump or cut dud programs like the Cash for Clunkers program unveiled during the election campaign, and the Green Car Innovation Fund, a greenwash piece of automotive industry protectionism.

The packaging of the recovery initiative – the two-for-one funding, the switch in focus to demand rather than the Government’s own, arbitrary commitment to the 2012-13 surplus – is the most impressive we’ve seen from this government for some time – although that isn’t saying much. There is now a selling job to do – to the Greens (who have already flagged concerns about the cutting of carbon abatement programs) and independents, and to the community. Another key component will be Wayne Swan’s speech in Brisbane tomorrow where he will outline some of the larger economic impacts of the floods.

Details, including a relaxation of temporary visa requirements for labour required by the flood, follow, taken from the Government’s press release:

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Preliminary estimates, following consultation with the Queensland Government, indicate that the Government will need to invest $5.6 billion in rebuilding flood-affected regions, with the vast majority going on rebuilding essential infrastructure.

Two-thirds of that funding will be delivered through spending cuts.

The other third will be provided by a modest one-year progressive levy that won’t be paid by people directly affected by the floods or by low-income earners.

The Government will deliver the funding through the following measures:

  • $2.8 billion in spending cuts, including removing industry assistance and cutting back other green programs by abolishing the Green Car Innovation Fund and the Cleaner Car Rebate Scheme and making other cuts.
  • $1 billion in delaying some infrastructure projects – which will free up funds and skilled workers at a time of skilled labour shortages around the country.
  • $1.8 billion through a progressive levy on people earning over $50,000. This will only apply to income above the $50,000 threshold. For example, someone earning $60,000 a year will pay less than a dollar a week, while someone on average annual adult full-time total earnings of $68,125 will pay $1.74 a week. Anyone directly affected by the floods will not have to pay the levy at all.

Where the funding is going

The vast majority of the $5.6 billion will be invested in rebuilding infrastructure damaged by the floods.

After discussions with the Queensland Government, preliminary estimates of the infrastructure repair costs under existing arrangements for the Natural Disaster Relief and Recovery Arrangements (NDRRA) are around $5 billion, of which the Australian Government will provide close to three quarters (around $3.9 billion).

There are also anticipated to be significant but smaller costs arising from flooding in other states.

The Government has also committed significant funding to provide for urgent assistance for those affected by flooding, in line with standard arrangements for natural disasters. This is estimated to include around $600 million for the Australian Government Disaster Recovery Payment and $120 million for the Disaster Income Recovery Subsidy.

Levy

The Government will introduce a modest one-year levy to help pay for the rebuilding effort. The levy will not be paid by those affected by the floods, will not be paid by lower income earners, and will apply only in the 2011-12 financial year. The levy is based on an individual’s ability to pay:

  • Anyone earning under $50,000 will not pay the levy.
  • People earning between $50,000 and $100,000 will pay 0.5 per cent of taxable income in excess of $50,000.
  • People earning over $100,000 will pay 0.5 per cent of taxable income in excess of $50,000 and 1 per cent of taxable income in excess of $100,000.

To make sure those affected by the floods do not have to pay the levy, anyone who received an Australian Government Disaster Recovery Payment for a flood event in 2010‑11 will be exempt from the levy.

Spending cuts

The Government will make $2.8 billion in spending cuts, with the funding to go towards the recovery and reconstruction effort, including:

  • Not proceeding with the Cleaner Car Rebate Scheme
  • Abolishing the Green Car Innovation Fund
  • Reducing and deferring spending on the Carbon Capture and Storage Flagships and Solar Flagships programs and the Global Carbon Capture and Storage Institute
  • Abolishing the Capital Development Pool from 1 January 2012
  • Discontinuing funding for the Australian Learning and Teaching Council
  • Reducing the National Rent Affordability Scheme dwelling target
  • Redirecting funds from the Priority Regional Infrastructure Program and Building Better Regional Cities Program
  • Capping annual claims under the Liquefied Petroleum Gas (LPG) Vehicle Scheme
  • Capping funding for the Renewable Energy Bonus Scheme – Solar Hot Water Rebate
  • Not proceeding with Round 2 of the Green Start Program
  • Capping funding for the Solar Homes and Communities Plan
  • Withdraw funding to the O-Bahn City Access project.

Infrastructure

The strong Australian economy means that Australia faces very real skills shortages. This pressure on skilled labour will increase in the face of the major rebuilding effort in Queensland. To make room for this demand the Government will defer $1 billion worth of infrastructure projects, freeing up builders, carpenters, electricians and other skilled workers to rebuild essential infrastructure in flood-affected regions.

Around $325 million of deferred projects have already been agreed with the Queensland Government, with the remainder to be discussed with the relevant state and territory governments.

Skills and the rebuilding task

As Australia rebuilds, this will create additional demand for skills and workers.

To assist employers in flood-affected areas fill positions and get on with the job of rebuilding, the Government will:

  • Establish a special team within the Department of Immigration to deliver employer-sponsored temporary visas (457 visas) within five days (where applications are ‘decision ready’) for employers genuinely involved in Queensland flood reconstruction work; and
  • Double the number of places in the job seeker relocation pilot program to help job-seekers move to take up employment opportunities.

The 457 visa program is demand-driven. These measures simply make it faster for employers to get the workers they need to rebuild. All workers seeking a 457 visa will still be subject to strict skills tests.