Government to make further spending cuts to pay Yasi damage bill

The cost of Cyclone Yasi has now reached over $1 billion with much of the damage to be felt in the agricultural sector, with the Government saying it will need to make further budget cuts to pay the bills.

The cost of the clean-up will also be felt by the insurance industry, although Suncorp has said its net claims costs will be capped at $10 million due to reinsurance protections.

However, Prime Minister Julia Gillard and Treasurer Wayne Swan have promised there will be no possibility that further tax levies will be introduced.

“We will meet the damages bill from the Federal Budget, it will require cutbacks in other areas, there is no point sugar-coating that,” Gillard told reporters.

“There will be people who aren’t very happy where the cutbacks are made, but we will rebuild from this cyclone and we will arrange the Federal Budget in order to do that.”

The Government has extended emergency payments to North Queenslanders affected by the cyclone, with affected taxpayers to receive $1,000 per adult and $400 per child as soon as possible.

Cyclone victims will not be subject to the flood levy, Gillard has announced – but this will take away “some millions of dollars” that would have been collected otherwise.

As a result, Gillard says further cuts will need to be made to the budget, in addition to the $3.8 billion in savings announced as part of the floods recovery package.

”There will be no increase to the levy. To the extent that there is any difference between the original $1.8 billion figure and the total amount collected because of this new exemption, we will make that up in other budget arrangements,” she said yesterday.

Much of the devastation will be felt in the agricultural industry.

The National Farmers’ Federation has said that up to $500 million of sugarcane has been damaged, representing about 30% of the country’s harvest, while farmers warn bananas could be priced at $13 per kilo as they were during the aftermath of cyclone Larry.

The NFF has also said that the total Innisfail crop has been damaged, along with the harvest in Tully, which represents about 85% of the country’s banana crop.

The damage felt by the industry will be exacerbated by the fact farmers are not likely to receive insurance payments for their farms. “Regrettably no, they won’t be covered for their crop losses,” Insurance Council of Australia chief executive Rob Whelan told Sky News yesterday.

The Reserve Bank of Australia said earlier this week it would consider inflation caused by natural disasters when setting monetary policy.

But meanwhile, questions have been raised over insurers’ ability to make payments due to being struck by floods and the cyclone within a short amount of time.

However, Suncorp announced yesterday that its net claims costs will be capped at $10 million, saying that reinsurance protection will minimise the impact of the cyclone.

“Suncorp has a range of reinsurance protection in place that will minimise the financial impact of Tropical Cyclone Yasi,” the company said.

Assessors are on their way to the areas hit by the cyclone, including Cairns of Townsville, with many of those staff recruited from overseas due to the scale of the disaster. The company has warned there will be “logistical challenges” in processing claims.

But analysts have said that although Suncorp has topped up its reinsurance, pricing will increase and premiums will go up as well.

However, investor sentiment towards major insurers including Suncorp and AMP appears to be improving, with a range of brokers including Deutsche Bank saying they have a positive outlook for the companies despite the recent challenges.

“Suncorp’s business transformation initiatives should provide additional leverage and generate stronger earnings momentum,” Deutsche analyst Kieren Chidgey said.

“As Suncorp shakes off Queensland storm concerns, we expect these themes to gather pace through 2011, driving upside to full-year 2012 consensus.”