The Federal Government has announced a special one-year levy to offset the cost of the Queensland floods, in a move that has been attacked by the Opposition and industry groups.
From July 1, the Government will put in place a new levy on salaries of 0.05% for people earning $50,000 to $100,000.
Those earning over $100,000 will pay an extra 0.1%. Flood victims will be exempt from the levy, in addition to those who earn less than $50,000.
The levy will be in place for the 2011-12 year and will raise $1.8 billion. Reconstruction costs from the floods are estimated to total $5.6 billion.
The levy will likely be supplemented by up to $3 billion in spending cuts, allowing the Government to fund reconstruction work while honouring its election promise to return the budget to surplus by 2012-13.
Finance Minister Penny Wong told ABC Radio there was no need to change the target for returning the budget to surplus.
“We do have very strong economic fundamentals, we do have a very strong pipeline of investment and you’d anticipate in a couple of years’ time that we would see the economy running close to capacity,” Wong says.
However, Wong said there will be “significant cuts” as the government deals with the inordinate task of rebuilding Queensland.
“There are hard decisions, but we have made them to find the resources needed,” she said.
Shadow Treasurer Joe Hockey has labelled the levy as “dumb”, stating it will come on top of tax increases on tobacco, alcohol and cars, and planned imports on minerals and electricity.
Opposition leader Tony Abbott believes the levy could deter people from making donations to the flood appeal, likening it to Woolworths’ and Coles’ decision to donate $5 million to the flood appeal before hiking up their prices in order to pay for it.
The coalition’s opposition to the flood levy has the support of Reserve Bank board member Professor Warwick McKibbin, who has warned the tax increase could cripple the economy even further.
According to McKibbin, the new tax will slow consumer spending unnecessarily, calling on the Government to accept a temporary increase in the budget deficit to cover the cost of rebuilding.
McKibbin says a 0.5% increase in the levy will equal a 0.65% increase in inflation on after-tax income, resulting in less available income for spending.
Heather Ridout, chief executive of Australian Industry Group, agrees the levy will impact consumer spending “at a time when consumers are already fairly cautious and already facing quite high increases in the cost of living”.
In order for the levy to be approved, the Government will have to win the backing of crossbenchers in the House of Representatives before attempting to move the levy through the Senate.
Wayne Kayler-Thomson, chief executive of the Victorian Employers’ Chamber of Commerce and Industry, says any levy increase should not tempt the Government to avoid cuts in unnecessary expenditure.
“It is important that the Federal Budget continues its journey back to surplus, not least to provide a buffer for future economic shocks,” he says.