Business groups slam flood tax but economists says economic impact will be minimal

The Australian business community has come out in force slamming the Government’s new flood levy, saying the entire bill should be paid for by savings and that a subsequent hit to consumer confidence will only hurt the retail sector while it’s down.

However, economists say the long-term impact on consumer confidence from the new tax will be minor given its relatively small size, the fact is runs for only one year and the underlying strength of jobs market.

Westpac economist Bill Evans told SmartCompany that while the risks of imposing a new tax are now greater than they would be otherwise due to fragile consumer confidence, he nevertheless believes the long-term impact on household spending is small.

“The scale of the tax is pretty small. Under normal circumstances, you would feel that it would have a minimal impact, but consumers are quite fragile after rate hikes, concerned for their house prices and so on.”

“So the situation right now is that because you have fragile consumers, the risks of raising taxes are higher than what they otherwise would be.”

“But we have a fairly credible commitment from the Government that it will not be extended given the reason it has been raised.”

“On balance, this tax will have a fairly minimal impact… but the risks of a greater impact are higher than what they would otherwise be in different circumstances.”

HSBC chief economist Paul Bloxham describes the tax as “a storm in a teacup”.

“The levy is small potatoes in the scheme of things. The bulk of the heavy lifting is being done by the spending cuts and redistribution. The levy will tax households but will then be spent on rebuilding parts of Queensland – arguably with little net addition to activity, just a re-distribution,” he said.

“The net result is that Federal fiscal policy is likely to be no more expansionary as a consequence of the floods. We have yet to see what the Queensland state government will do, though we suspect it will be net expansionary.”

CommSec economist Craig James also points out that while questions remain over whether the tax needs to be applied at all, “this is the right levy for the times – modest in size, temporary, progressive and applying to those on higher incomes”.

However, James says there is no “economic imperative or urgency for the budget to be brought into surplus” in 2012-13 has Prime Minister Julia Gillard had argued.

This is a sentiment echoed by various business groups.

CPA Australia head of policy Paul Drum says the Government should not be forced into a political corner and should consider extending its 2012-13 budget surplus deadline.

“We’re not saying there can never be a levy – Australia is no stranger to levies. But have we found the savings in the budget? Have we looked through and found all the savings that we can?”

“Secondly, should the Government really stick to its timeline of bringing the budget into surplus? Is 2013-14 going to be so bad?”

Drum points out the Government can make some savings in different areas – he points to funds earmarked for the school halls project that the Government can divert into flood-affected areas.

But he also says that given the size of the levy, the impact is likely to be small and that “if you’re going to have a levy, this is the fair way… the design features are progressive and it looks fairer”.

Meanwhile, several business groups have attacked the Government.

Business Council of Australia president Graham Bradley has said in a statement that more savings should be exhausted before a levy is introduced.

“The Federal Government is putting the cart before the horse with a flood levy when the full cost of rebuilding after the floods is not yet known,” he says.

“Until we get a final assessment of the rebuilding costs, we can’t gauge the impact on the Federal Budget, but the first step should be to reassess spending priorities in preference to raising new taxes.”

Other groups including the Australian Manufacturing Workers Union and the Australian Solar Energy Society have attacked Gillard’s decision to scrap or scale back climate change-focused programs such as the Green Car Innovation scheme, the Solar Flagships scheme and a solar hot water rebate scheme.

”It is a bitterly disappointing decision and a very unnecessary decision,” Federal Chamber of Automotive Industries chief executive Andrew McKellar told Fairfax.

The Australian Chamber of Commerce and Industry also said the use of a tax is regrettable given there are more savings to be found within the budget.

“As the government has noted, the $5.6 billion infrastructure rebuilding task will be significant. However, value for money and strong government oversight still needs to be paramount in spending public monies, especially if this occurs in a very short timeframe.”

“Tax increases whether temporary or otherwise have an economic impact and are likely to place continuing pressure on already anaemic levels of consumer spending”.

However, some groups have been more accepting of the tax. Australian Industry Group chief executive Heather Ridout said yesterday that “given the extraordinary circumstances, industry can live with the Federal Government’s flood recovery package”.

But she did point out the AIG has concerns over the transparency and accountability of the program.

The Government has also faced political scorn over the tax. The Greens have slammed Gillard for scrapping climate change programs, accusing her of backing out of a long-term commitment to environmental protection.

Coalition leader Tony Abbott has also said the implementation of the tax will be flawed, predicting that “many people who shouldn’t pay the tax will pay the tax”.