Is an earthquake disaster levy the way to go?

Australia has had more time than New Zealand to consider the merits of disaster levy – in its case to help pay for rebuilding after floods devastated Queensland. The reconstruction bill for there is estimated at around $A5 billion and as high as $A20 billion for broader economic costs to the nation.

Australian Prime Minister Julia Gillard’s rebuilding plan includes flood levy of A$1.8 billion on earnings above A$50,000 (she has yet to win the support to implement it). Such levy would mean six out of 10 Australians paid less than A$1 week, the government argues.

Opposition Leader Tony Abbott sounded rather like ACT leader Rodney Hide in saying he was simply opposed to “unnecessary new taxes, and that’s what this is”.  Another line of objection was expressed by the insurance industry, which warned of increased premiums. Insurance Council of Australia boss Rob Whelan said: “We don’t want people to turn away from insurance, which is about providing for your own risks in your own way, and then rely on government to bail you out whenever there is problem. When you know that the government will bail you out, then you are less inclined to spend the money on insurance.”

Reserve Bank of Australia board member Warwick McKibbin (speaking as an economics professor at the Australian National University) told parliamentary inquiry into the temporary flood reconstruction tax, the majority of economists would agree the levy was not sound economic policy.

“Most economists would have drawn the conclusion that borrowing was the way to deal with this,” he said. The government’s decision to impose levy on wealthier Australians was part of “counter-productive” ideological opposition to debt. He also said both sides of politics should move away from the focus on debt to the quality of spending.

Prime Minister John Key can’t ignore debt because this country is wallowing in it. This constrains his options. He says the Treasury is studying the implications of the earthquake and options for funding the recovery – rebuilding Christchurch could take between five and 10 years and will cost more than $14 billion.

Key’s preference at this stage seems to be to increase the Earthquake Commission levies paid from household insurance rather than setting general temporary disaster levy, although this could see the EQC component of insurance premiums treble from an average $60 year to $180. In major difference from New Zealand, the Australians don’t have the option of an EQC levy.

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