03/02/2011 - 00:00

Flood response reveals problems

03/02/2011 - 00:00

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The federal government’s planned flood levy has attracted vigorous debate, but a larger issue is the setting of spending and infrastructure priorities.

THE Queensland floods are widely accepted as one of the largest and most damaging natural disasters ever experienced in Australia.

They will put a substantial dent in the nation’s economic growth rate and will require a massive repair and reconstruction effort.

The federal government has responded with a $5.6 billion funding and skilling package to be spent over the next four years.

The commitment of large sums of money to the rebuilding program cannot be questioned, but what can be debated is the way in which this is funded and the efficiency with which the funds will be spent.

The government’s package includes cuts to a number of existing spending programs and a new $1.8 billion flood levy weighted towards high-income earners.

The levy has attracted most comment, with opposition leader Tony Abbott leading the attack, saying the government should have looked harder for offsetting savings.

Some commentators have proposed different spending cuts, such as on the foreign aid budget or delaying the roll-out of the National Broadband Network.

Others believe a higher budget deficit should be tolerated.

To put this in context, the federal budget deficit stood at $54 billion, or 4.2 per cent of GDP in 2009-10.

The government is aiming to reduce the deficit to $41 billion this financial year, or about 3 per cent of GDP.

It aims to follow that with a return to surplus in 2012-13 of $3.1 billion, or 0.2 per cent of GDP.

The slender size of the projected surplus makes the flood levy important, but not from a financial or economic perspective.

There is little practical difference to the economy if the budget is in a small surplus or a small deficit. After all, federal government expenses total nearly $350 billion each year.

Rather, the surplus has become politically important because governments, including this one, have set up that goal as the critical test of fiscal credibility.

The Rudd/Gillard government created that bind for itself because it spent profligately during the global financial crisis and is now trying to rebuild its reputation.

The bigger underlying question is how spending priorities are set in the first place. This is where Canberra’s credibility really falters.

Many of the spending cuts announced last week by Prime Minister Julia Gillard related to climate change and environmental management programs.

These include the Green Car Innovation Fund, the Cleaner Car Rebate Scheme, the Carbon Capture and Storage Flagships and Solar Flagships programs, the Solar Hot Water Rebate, the Green Start Program, the Solar Homes and Communities Plan and the Global Carbon Capture and Storage Institute.

When they were announced, these were promoted as critical measures. Now the government is spinning a cute line about these programs not being needed because of its plans to put a price on carbon. That is a very long stretch.

The whole exercise highlights the need for every statement coming out of Canberra to be subjected to very careful scrutiny.

Canberra has also signalled that spending on other infrastructure projects will need to be cut, prompting Premier Colin Barnett to suggest that the planned upgrade of roads around Perth airport could be deferred.

State opposition spokesman Ken Travers says the government is playing with smoke and mirrors, because these road projects were not due to commence for several years anyway.

That may be true but again there is a bigger underlying issue – the danger that short-term policy fixes will be to the detriment of the state’s long-term interests.

Chamber of Commerce and Industry WA chief James Pearson is worried that government-funded infrastructure projects might not keep pace with private-sector projects.

“A failure to do so would handicap the state’s growth and would drive the costs of doing business even higher by constraining the economy’s expansion,” Mr Pearson warned.

Short-termism is also apparent in Canberra’s willingness to deal with likely skilled labour shortages in Queensland.

It plans to fast-track approvals for temporary skilled migrants who work on flood rebuilding, yet it has hesitated when industry in Western Australia has called, time and again, for more policy action to deal with chronic labour shortages in this state.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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