28/01/2011 - 00:00

Mix fiscal caution with compassion

28/01/2011 - 00:00

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Canberra’s response to the Queensland flood crisis is a huge political test, and will have a major influence on the national economy.

SINCE the scale of the Queensland floods became apparent, there has been continued debate over how the government and corporate sectors should respond.

The corporate sector has already acted, with very substantial pledges of financial support – BHP Billiton, Wesfarmers, Xstrata and others have made multi-million dollar donations to flood relief appeals.

The banking sector has also assured customers it will modify its standard policies, particularly on loan repayments, to help people cope with the inevitable loss of income.

However, the toughest issues will confront the insurance industry, which has already come under political and community pressure to be ‘compassionate’ towards flood victims.

How should the industry deal with people who thought they had flood cover but did not have right type of flood cover?

And how should it deal with people who were unable to obtain flood cover because they lived in a high-risk location?

This is an example of where the interests of shareholders, at least in the short term, are at odds with the expectations of policyholders and the wider community.

If the insurers value their reputation, they will show considerable flexibility and compassion in their assessment of insurance claims.

Perhaps a bigger, longer-term issue they need to address is the clarity of their written policies. The reality is that most people are unaware of the finer points of their insurance coverage, and that hits hard at times like now.

Another long-term issue, for both insurers and government, is whether people should be allowed to build in locations considered so risky they can’t get insurance coverage.

For government, the biggest issue is how much money gets poured into the reconstruction effort.

Treasurer Wayne Swan said this week there was no doubt the floods would rank as one of the most costly natural disasters in Australia’s history, surpassing the economic toll of the recent Victorian bushfires and Cyclone Tracy, which flattened Darwin in 1974.

The extent of the floods across much of Queensland and parts of NSW and Victoria means they will have an appreciable impact on the national economy.

The short-term hit will come from loss of production, including from coal mines and farms.

These industries have been affected directly by the floods, and will also be disrupted by the damage to railways and other critical infrastructure.

Some economists have estimated the floods could knock one percentage point off Australia’s growth rate over the March and June quarters.

Much of this will be attributed to the coking coal industry, which contributes around 10 per cent of Australia’s exports and 2 per cent of GDP.

Reconstruction spending, estimated in the billions of dollars, will, ironically, provide a significant economic boost to Australia’s economic growth rate, even though it is simply replacing damaged assets.

The issue here is that taxpayers across Australia will have to foot the bill.

In framing its response, the federal government will face the same kind of questions confronting the insurance sector.

It wants to be compassionate but needs to be fiscally responsible.

Its ability to respond to this crisis will be heavily constrained by its response to the global financial crisis, when Canberra poured extra money into the economy.

That spending may have cushioned the effect of the GFC, but it also meant Australia’s finances were stretched.

Mr Swan is very aware of the balancing act he needs to perform, saying the government will do “all that we responsibly can”.

“The enormous task ahead of us will require difficult spending cuts in our budget, and we’re working through all the options – including a temporary levy,” he said.

Without making any commitment, Mr Swan seemed to be softening up the community for a new levy, referring to the use of levies in the past to fund programs such as the gun buyback scheme, worker entitlements after the collapse of Ansett Airlines, and assistance packages for the dairy and sugar industries.

A Western Australian example was the special WA Inc levy introduced by the Court government.

A particular challenge will be providing support in a timely manner, while also ensuring the spending makes long-term sense.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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