Monday, 21 February 2011
Economics Committee; Reports
On behalf of the Standing Committee on Economics, I present the following reports of the committee, together with the minutes of proceedings and evidence received by the committee: Advisory report on the Tax Laws Amendment (Temporary Flood Reconstruction Levy) Bill 2010 and the Income Tax Rates Amendment (Temporary Flood Reconstruction Levy) Bill 2011, and Interim report: Review of Wild Rivers (Environmental Management) Bill 2010.
Ordered that the reports be made parliamentary papers.
by leave—The dimensions of the Queensland flood disaster have been staggering. Between 30 November 2010 and 24 January 2011, 35 people have died as a result of flood related incidents. This is the foremost tragedy of these events, and the committee unanimously extends its deepest sympathies and condolences to the families and friends of the victims.
From the end of November 2010 through to mid-January 2011, flooding occurred over large areas of South-East and Central Queensland, with areas such as Condamine and Chinchilla being flooded several times. In addition, in North Queensland the Herbert River flooded, with the town of Ingham being isolated. Almost every river in Queensland south of the Tropic of Capricorn and east of Charleville and Longreach, except for the south-east coastal fringe south of Maryborough, reached major flood levels at some stage between 26 November 2010 and 7 January 2011. From 10 January to 12 January 2011, floods affected South-East Queensland, causing major flooding of the Lockyer, Bremer and Brisbane rivers. These were the most destructive floods of the December-January period.
The loss of property has been devastating. As of 21 January 2011, an estimated 5,400 homes across Queensland saw flooding over the floorboards. The number of affected homes is 21,000, while a further 15,000 had flooding in their yards. Three thousand six hundred homes were evacuated and 5,900 people were evacuated. In response, the government established over 70 evacuation centres. The property damage has had a terrible effect on individuals and families. The Australian Council of Social Services stated:
Some of this will have an effect on people that lasts many years. Even though the flood itself was relatively short in duration, if your house and all your household possessions were destroyed—family records were often completely lost—that may have all sorts of impacts, material, emotional and psychological. In many cases it will take many years for people to rebuild their lives to the point they were before the flooding.
Of Queensland’s 73 local government areas, 51 have had a disaster declaration since the events started, and 14 of those local government areas have been severely affected by the flooding. Ninety thousand kilometres of local government roads have had some form of damage.
Cyclone Yasi ripped through the Queensland coast near Innisfail and Cardwell on the morning of 3 February 2011. Rated category 5, the cyclone featured extreme conditions such as wind gusts of up to 285 kilometres per hour, a lowest air pressure of 929 millibars at Tully and a five-metre storm surge at Cardwell, just south of Mission Beach. The environment also suffered. Preliminary figures show that Cyclone Yasi destroyed 150 homes and left a further 650 uninhabitable. A further 2,275 homes were moderately damaged and tens of thousands of homes were without power for a long period of time.
At the same time, we saw floods in Victoria. At the end of January, the Victorian Department of Primary Industries calculated that the damage to agriculture could be as much as $2 billion. This includes over 41,000 hectares of field crops, over 51,000 hectares of pasture, 83,000 tonnes of hay and silage, and almost 2,000 kilometres of fencing.
In evidence before the committee, the Queensland Treasury outlined progress so far in that state. On 15 February, the Premier tabled the Queensland Reconstruction Authority Bill in the Queensland parliament. The new independent authority will manage and coordinate the government’s program of infrastructure reconstruction and recovery within disaster affected communities. It will be overseen by a Queensland reconstruction board which will be chaired by Major General Slater. The primary mechanism for responding to natural disasters is the Commonwealth-state natural disaster relief and recovery arrangements. The Australian and Queensland governments are developing a national partnership agreement which is intended to further strengthen the governance and accountability provisions of the NDRRA. This will include detailed performance monitoring and reporting arrangements and new governance arrangements, including the establishment of the Australian Government Reconstruction Inspectorate.
There is a minority report in which members of the opposition say that it is unclear how or where the money will be spent. Quite clearly that flies in the face of the way in which this money is to be monitored and used and the purposes for which the money is being raised, and that is to make sure that we can rebuild Queensland and the areas that have been affected by the disaster.
We also heard evidence from the Insurance Council of Australia. They have allocated reserves of over $2 billion to meet costs arising from the Queensland floods, which comprise some 43,000 claims. For Cyclone Yasi, half a billion dollars has been allocated, comprising 30,000 claims. There were two issues that the Insurance Council identified. The first is developing a standard definition for ‘flood’, which needs to happen, and the second is developing publicly available flood data that insurance companies can use to accurately determine the flood risk for individual properties. There was some discussion and evidence from the Insurance Council about ways in which insurance could be better used more globally. The view of the majority on the committee was that natural disasters are a reminder that there are a range of significant policy issues in the insurance field that would benefit from a government sponsored review. The committee encourages the government to look at such a process.
The Commonwealth response to the floods is worth putting on record of course. On 27 January 2011 the Prime Minister announced a package to help rebuild flood affected areas. The government estimates that its contribution to the reconstruction of essential infrastructure would be $5.6 billion. This is made up of two-thirds coming from savings in government programs and one-third coming from the flood levy, which was the bill that the committee in particular was asked to look at.
What is interesting is the response of the markets once that announcement was made. The markets are very sensitive to public pronouncements in relation to the economy, and this was one of those. The markets made it quite clear—for example, Citi stated:
The package helps to moderate some pressures on inflation from the flood.
At the margin the package assists the RBA in managing the inflation impact from the rebuild.
The Commonwealth Bank said:
There are some attractive features to these proposals. Adding an (essential) rebuilding overlay to an economy already at full employment carries with it some inflation risks. Making room by lifting taxes and cutting spending looks appropriate even though the fiscal backdrop remains very good.
Christopher Joyce, the managing director of Rismark, said:
More specifically, the government is trying to reduce the inflationary consequences of the floods for fear of the influence they have on monetary policy. This makes sense.
Craig James from CommSec said:
… this is the right levy for the times—modest in size, temporary, progressive and applying to those on higher incomes …
The proposed operation of the bill is that it raises a one-off levy that applies to individuals’ taxable income in 2011-12. It is projected to raise $1.56 billion in 2011-12 and $235 million in 2012-13. Funds raised will be paid into consolidated revenue, where the arrangements that I have already mentioned come into place in terms of monitoring their spending. The levy does not apply if a taxpayer earns less than $50,000 annually. If the taxpayer earns between $50,000 and $100,000 in 2011-12, then the income above $50,000 is taxed at a rate of 0.5 per cent. If the taxpayer earns more than $100,000 annually, then they pay $250—the tax on their income up to $100,000—and then their income above $100,000 is taxed at one per cent.
With this structure, the levy is clearly progressive. In evidence, both the Australian Council of Social Security and the Australian Council of Trade Unions supported this feature. Certain classes of taxpayers can be excluded from the levy. This comprises those people who are affected by the natural disaster between 1 July 2010 and 30 June 2012. In order for the exemption to apply, the Treasurer must make a legislative instrument to this effect.
It is worth noting that the total number of taxpayers earning in excess of $50,000 is 4.84 million. From this figure, we subtract the 185,000 people who are estimated to be declared exempt from the levy, which leaves about 4.66 million people who are expected to pay the levy. This is out of a total of 10 million taxpayers, so it is just under half of taxpayers.
By way of comparison, the committee asked the Treasury what proportion of taxpayers paid the one-off increase to the Medicare levy from 1.5 per cent to 1.7 per cent to help pay for the gun buyback scheme in 1996-97. The answer was that 6.9 million individuals paid the Medicare levy, so just over two million people paid the levy out of 8.6 million taxpayers. That made up 80 per cent of taxpayers at that time, whereas this levy only affects fewer than 50 per cent of taxpayers.
This is a levy that is required to make sure that we are able to meet the challenges of the rebuild in Queensland. Two economists appeared before the committee. Each of them had differing views in relation to how the funds could be raised, but neither of them said that raising the levy was a wrong option for the government to look at. Quite frankly, the markets have said that this is a response that we should and must take.
It is interesting also to note the response of the public. There has been poll after poll in relation to this, and they have shown overwhelming support for the levy. It is worth mentioning polls because the member for Moncrieff, the deputy chair of the committee, ran a poll on his website as to whether the levy should be paid. When we came into the House, I think it was running at around 70 per cent in support of the levy. Even those opposite know that this is a levy that is supported by the general public.
At a time of widespread tragedy and devastation, the broad spectrum of Australian society has responded to the floods and other natural disasters in a multitude of ways such as through donations of money or goods, giving others temporary accommodation, and clean-ups. Governments are repairing and rebuilding infrastructure. The question presented by the bill is how the government may pay for the rebuild. The committee is of the view that we can fund the recovery of essential infrastructure so as to reflect our wider response to the disaster. In evidence, the Australian Council of Trade Unions referred to our need to take collective responsibility for each other. They said:
… as a nation, we believe we need to take collective responsibility for each other’s welfare, particularly in times of disaster …
This is a levy that is required. It is something that is needed. The recommendation of the majority on the House of Representatives Standing Committee on Economics has recommended that the House of Representatives pass this bill.
by leave—I rise on behalf of coalition members to speak to the dissenting report that was put forward by the coalition members to the House of Representatives Standing Committee on Economics with respect to the reference of the Income Tax Rates Amendments (Temporary Flood Reconstruction Levy) Bill 2011 and the Tax Laws Amendment (Temporary Flood Reconstruction Levy) Bill 2011.
All members of the committee are joined and united in the view that this summer was a time of trial and tribulation not only for Queenslanders but, indeed, across much of Australia. The summer of 2010-11 proved to be a very bad one indeed, and we have already heard the chairman outline a number of consequences where we saw extraordinary loss, damage and suffering—unfortunately not unprecedented, though, in this country. Australia has for many, many decades certainly been a country of extremes when it comes to weather. For those that have had their homes inundated in flooding—the 21,000 or so affected—to consider that in Queensland alone, for example, 51 of the 73 local government areas were declared areas of emergency just highlights that this was an incredibly bad summer. To compound the flooding that took place across parts of Queensland and Victoria, we also had, for example, Cyclone Yasi, which struck North Queensland and in particular the townships of Tully and Cardwell and surrounding communities.
That really is at the epicentre of what gave rise to the inquiry that was undertaken by the economics committee. On 27 January of this year, we saw the government announce its new flood tax. Estimating that it would be liable for repair and reconstruction to the amount of about $5.6 billion, the government announced this new flood tax in the context of saying it was necessary to raise money through taxation coupled with, at that stage, about two-thirds of the funding being sourced from spending cuts the government was making. Much of this has now been overturned, but I will go to that in a moment.
The coalition members of the committee were the ones who instigated this report. The coalition had concerns about the government’s continued predisposition to impose new taxes as part of its fiscal solution. The concern of the opposition—of coalition members—was that once again we saw Labor revert to form, seeing higher taxing and more spending as the way forward. So the coalition took the view that what we needed to do was to work in a cooperative way with the government, and we made a number of options available to the government. The first was that the Leader of the Opposition signified that he was willing to work with the Prime Minister in a constructive and bipartisan way to identify cost savings that could be achieved in the budget so that Australians did not have to face the prospect of yet another new tax under this government. That offer was rejected by the government.
So, as part of our attempts to ensure that we hold the government to account, we proposed—and referred to the economics committee—that these bills be subject to a short, sharp inquiry. We worked in a constructive way with the government for only a one-week time period for this inquiry, and indeed the inquiry itself took place over the course of one day. We felt as coalition members of the committee that it was appropriate that there be as comprehensive an investigation as possible—given the parameters and the time frames involved—for us to look at this new levy raising nearly $2 billion. It was disappointing, therefore, as part of the process and the investigation into this new flood tax, that after only 45 minutes, with a very clear need for there to be additional questioning of Commonwealth Treasury officials, the Labor Party gagged coalition members from seeking an extension of time with respect to questioning of Commonwealth Treasury officials. It seems entirely unnecessary when there were adequate breaks in the course of the day for the committee to continue questioning, and it raises the question of why the government refused to allow the additional questioning on a new $2 billion tax when it could easily have been accommodated in the work program that the committee had. But, that notwithstanding, that was an issue of process.
With respect to the merits or demerits of the new flood tax, the evidence is clear, and it is summarised in the dissenting report that coalition members put forward. The evidence is clear that the reason why this new flood tax is not the appropriate response to the natural disasters that we have had is that it creates a new precedent. First of all, we know that this new flood tax is unnecessary. It is entirely arbitrary and there is no connection that has been made by witnesses or indeed by the government about why, with $5.6 billion in estimated and forecast expenditure required by government for the repair and reconstruction effort, a flood levy of $1.8 billion needs to be raised. It is entirely arbitrary.
So we remain inquisitive as to why this amount was the amount that the government has decided to raise. Bear in mind that, when it was first announced on 27 January, the government said that two-thirds of the required expenditure would be found through savings, yet despite this much has actually been overturned. For example, the government announced the reversal of some $364 million under the Solar Flagships program and the National Rental Affordability Scheme to secure the support of the Greens. In addition to that, $50 million of funding cuts under the Australian Learning and Teaching Council have also been reversed, which was made necessary by the government attempting to buy the support of the member for Denison as well. These examples just highlight the fudgy figures this government works on when it comes to something as important as imposing a new tax on the people of Australia.
In addition to that, we raised our concerns about the fact that, had there not been billions of dollars of wasted expenditure previously, again this flood tax would not be necessary. This is a government that wasted over $2.4 billion under Building the Education Revolution, that wasted another $1 billion or thereabouts under the failed insulation program and that then says it needs to tax the Australian people $1.8 billion as part of a flood rescue tax, as it likes to package it. The reality—clear from the evidence—is that it would have been entirely unnecessary had money not been wasted to the tune of billions of dollars.
But, from an economic perspective as well, there were clear arguments made that there was no economic rationale in favour of this new tax. In particular, I would highlight two economic experts that gave evidence to the committee: Mr Saul Eslake and Professor Warwick McKibbin, both of whom gave very detailed information about the merits or demerits of the flood tax. Both highlighted that there were effectively three pathways available to government when it came to the repair and reconstruction costs that needed to be met: to impose a new tax or increase an existing tax or taxes; to reduce spending on another program or programs; or to borrow the necessary funds and repay the debt over time—or a combination of all three of those. Mr Eslake in evidence said:
I would be concerned if every time a significant or expensive natural disaster or indeed any other exigency fell to the Australian government the response was to slug the 40 per cent of the population who are considered rich enough to bear an additional tax burden. I think that would be problematic, although there is an element of political judgment in that as well as economic. But, obviously, if you continue to increase marginal rates of tax on a segment of the population by large amounts or with high regularity over time then there could well be some adverse consequences for incentives to work, save, invest and the like, which have been well documented in the economics literature.
Professor McKibbin said:
I wish to comment on the principle of how to finance the cost of a natural disaster or any temporary negative economic shock. The main reason for focusing on this issue despite the relatively small amount of money involved in the current case is to make sure that important principles are in place for future disasters and future economic decisions which may be of significantly larger magnitude.
Most economists who study public finance would support the view that taxation is not the optimal way to finance the reconstruction of infrastructure after a natural disaster. The argument has a long tradition in economics.
The two economic experts that gave evidence to the committee made it very clear that, out of all the pathways available to government, this government’s choice was the least preferable. That is part of the reason that the coalition members formed the view that these bills should not be supported. In addition to that, unintended consequences were highlighted. It is clear, based upon the evidence that the committee heard, that among a multitude of foreseeable unintended consequences there also exists the very real likelihood that, as a result of the government imposing this new flood tax, next time—and there will be a next time, unfortunately—a natural disaster occurs Australians will be less willing to dig into their pockets to make a donation to support. The reason they will be less willing is the very realistic expectation that the government will impose a new tax or increase taxation as part of the relief and reconstruction effort. For this reason as well, the coalition members were unimpressed with the government’s path to imposing a new tax. Further to that, there are significant transaction costs associated with the new tax, which Professor McKibbin referred to. He said that he expected up to 10 per cent of the revenue from the tax could be lost through churn in collection.
In addition to that, an issue that concerned coalition members and senators is the moral hazard of the Commonwealth vis-a-vis the states. We heard from numerous witnesses, including Mr Bradley, the Queensland Under Treasurer, and the Insurance Council of Australia, that there is a very real moral hazard whereby, as a consequence of the natural disaster funding arrangements that exist in this country, the states are effectively underwritten by the Commonwealth government. Various states have taken different decisions in seeking reinsurance of public infrastructure. The state of Queensland took the decision not to seek reinsurance, arguing that it was uneconomic to do so. I sought advice from Mr Bradley, as the Queensland Under Treasurer, as to what the premium was expected to be and an answer was not forthcoming, unfortunately. That notwithstanding, what is clear and what is on the record is that Queensland took the decision not to undertake commercially available reinsurance because it knew that the Commonwealth would, in time of crisis, step in. The imposition of this new flood tax exacerbates that problem both politically and economically. Politically, we as coalition members feel the argument can already be made that for any state government the decision to go to the Commonwealth to seek reconstruction repair costs is enlivened by the fact that the politics and precedent that this new flood tax creates make it politically more acceptable for a state government to do precisely that.
The final argument that the committee had concerns about was those who will be paying for this new flood tax. The ACTU made the argument that those who can afford it should pay the tax. This is despite the fact that the flood tax kicks in at over $50,000 a year unless the recipient has received the Australian government disaster relief payment. As it currently stands, the average wage in Australia is $65,000 a year, so we already know those earning below the average wage will have to pay the tax. There is also, unfortunately, a high likelihood of inequities arising as a consequence of the design of this new tax. Professor McKibbin said:
I am sure that there are Queenslanders out there who had no insurance, who incurred significant damage and did not receive any assistance from the government. They will now be hit with the levy.
This reason more than any other highlights the gross inequity of this new tax, where those least able to afford it, those earning below an average wage and those who have suffered economic harm as a consequence of these natural disasters will now have that harm magnified as the government imposes this new flood tax on them. For all of these reasons, coalition members recommended to the committee that the bills be rejected and not supported through passage of this House.
That the House take note of the Inquiry into the Income Tax Rates Amendment (Temporary Flood Reconstruction Levy) Bill 2011 and the Tax Laws Amendment (Temporary Flood Reconstruction Levy) Bill 2011 report.
In accordance with standing order 39(d), the debate is adjourned. The resumption of the debate will be made an order of the day for the next sitting.