Monday, January 31, 2011

Floods' economic pain is greatly exaggerated

Ross Gittins

Most of us are back at work, but the silly season won't be over until we get the Queensland floods into perspective. They are a great human tragedy, but they're not such a big deal for the economy.

It's not surprising the public has been so excited about such amazing scenes and so much loss of life and property. Nor is it surprising the media devoted so much coverage to the floods when, with most of us at the beach, there's been so little other news.

It's not even surprising the Gillard government has been beating up the story, making it out to be the biggest thing since the global financial crisis. At one level this is just the pollies doing their instinctive I-feel-your-pain routine. They could seem heartless if they tried telling people things weren't as bad as they seemed.

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At another level it's easy to see Julia Gillard trying to gain the same boost to her popularity as Anna Bligh. She'd be well aware of all the seats Labor lost in Queensland at the election in August. It's an almost inevitable assumption by the punters and the media that if an event is huge in human and media terms it must be just as big in its effect on the economy. When the punters tire of seeing footage of people on roofs, you "take the story forward" by finding some expert who'll agree it also spells disaster for the economy.

The wise and much-loved econocrat Austin Holmes used to say that one of the most important skills an economist needed was "a sense of the relative magnitudes" - the ability to see whether something was big enough to be worth worrying about.

That sense has been absent from the comments of those business and academic economists on duty over the silly season, happily supplying the media's demand for comments confirming the immensity of the floods' economic and budgetary implications.

With the revelation last week of the econocrats' estimates of the likely magnitudes, it's clear the figures supplied by business economists were way too high. And the economists' furious debate over how the budgetary cost of the rebuilding effort should be financed is now revealed as utterly out of proportion to the modest sums involved.

Of course, you still wouldn't have twigged to this had you focused on the government's rhetoric rather than its figures. In Gillard's speech on the budgetary costs and Wayne Swan's speech on the economic impact both were busily exaggerating the size of the crisis, even while revealing how small it really was.

Gillard said it was "the most expensive disaster in Australia's history" and that the "cost to the economy is enormous". The government's task, she kept repeating, was to "rebuild Queensland".

Swan repeated that "this is likely to end up being the most costly disaster in Australian history", which was "going to cost Australia dearly" and involves a "massive reconstruction effort". The closest he got to the truth was his observation that "the economic questions pale into insignificance next to the human cost of what we've seen".

If this is the most expensive natural disaster in Australian history, all it proves is the cost of earlier disasters was negligible. If you can "rebuild Queensland" for just $5.6 billion, it must be a pretty tin-pot place.

If $5.6 billion seems a lot, consider some "relative magnitudes": the economy's annual production of goods and services (gross domestic product) totals $1400 billion, and the budget's annual revenue collections total $314 billion.

Note that, though no one's thought it worthy of mention, the $5.6 billion in spending will be spread over at least three financial years, making it that much easier to fund.

We know that more than a third of the $5.6 billion will be paid out in the present financial year with, presumably, most of the rest paid in 2011-12. So just how the flood reconstruction spending could threaten the budget's promised return to surplus in 2012-13 is something no one has explained.

And if $5.6 billion isn't all that significant in the scheme of things, how much less significant is the $1.8 billion to be raised from the tax levy? The fuss economists have been making about it tells us more about their hang-ups over taxation than their powers of economic analysis.

And how they can keep a straight face while claiming it could have a significant effect on consumer spending (well over $700 billion a year) is beyond me.

Turning from the budget to the economy, Treasury's estimate is that the floods will reduce gross domestic product by about 0.5 percentage points, with the effect concentrated in the March quarter.

Thereafter, however, the rebuilding effort - private as well as public - will add to GDP and probably largely offset the initial dip. So the floods will do more to change the profile of growth over the next year or two than to reduce the level it reaches.

Most of the temporary loss of production will be incurred by the Bowen Basin coal miners. But, though it won't show up directly in GDP, their revenue losses will be offset to some extent by the higher prices they'll be getting as a consequence of the global market's reaction to the disruption to supply.

And despite all the fuss the media have been making over higher fruit and vegetable prices, Treasury's best guess is that this will cause a spike of just 0.25 percentage points in the consumer price index for the March quarter, with prices falling back in subsequent quarters.

So the floods do precious little to change the previous reality that, with unemployment down to 5 per cent and a mining investment boom on the way, the economy is close to its capacity constraint and will soon need to be restrained by higher interest rates.


Floods levy may help rich and hurt poor

Gillard wants to help the most needy but her new tax is hardly foolproof.

ONE criticism made about the flood levy is that "taxation" is the wrong sort of instrument to provide disaster relief, that there is something unseemly about forcing people to give charity, especially when the recipients are our compatriots. "Mates," Tony Abbott tells us, "help each other; they don't tax each other."

In a world where we could rely on people freely dipping into their pockets to solve the world's problems, there might be something to this criticism. But people don't dip into their pockets nearly often - or deep - enough.

According to the Giving Australia report, published in October 2005, voluntary giving in Australia amounts to only 0.68 per cent of GDP (less than half of what Americans give). Of this, only about an eighth goes to people overseas.

This might explain why we resort to taxes to provide much of our foreign aid. But even the foreign aid we give through taxes - about 0.35 per cent of gross national income - is far from enough. When Haiti was rocked by an earthquake last year - a disaster far more costly in monetary and humanitarian terms - Australia provided only $15 million in aid (less than 1 per cent of the $1.8 billion that the government plans to raise through the flood levy).

This is not to criticise or belittle the provision of much-needed support to flood-affected areas. It is only right that we, as fellow citizens, should support those devastated by the recent floods. But do we do enough to help those in need when they are not our "mates"? Are fellow citizens really 100 times more deserving of our support than victims of overseas disasters? We go out of our way to help disaster victims in our own country but we incarcerate people fleeing disasters overseas.

There is nothing fundamentally unjust or unfair about the idea of using taxation to raise aid. The federal government has imposed similar levies before, often for less urgent needs. Nonetheless, the government must ensure that the levy does not exacerbate existing disadvantage.

The purpose of redistributing wealth through taxation should be to alleviate the hardship of those who are worse off, to improve the life chances of the disadvantaged so that it is not only the wealthy who have the opportunity to lead a flourishing life. Taxes that take from the worse off and give to the better off aggravate social disadvantage by increasing the inequality in life chances between the rich and the poor.

The government has rightly made the flood levy a progressive tax, charging people according to their ability to pay.

Much has also been made about those affected by the floods not being asked to pay the levy. This means that anyone who has received either a Disaster Recovery Payment or a Disaster Income Recovery Subsidy will be exempt. But these payments are not means tested. People who earn hundreds of thousands of dollars a year are eligible for these payments. Anyone who was "stranded within their home or unable to gain access to their residence for at least 24 hours, or whose principal place of residence was without electricity, water, gas, sewerage or another essential service for at least 48 hours" is eligible for the payment, while anyone who can demonstrate a direct loss of income from the floods is eligible for the income subsidy.

Even if they don't need these payments, affluent households may still claim them simply to avoid the flood levy, and so many of those living in multimillion-dollar homes along the Brisbane River may well be exempt from paying.

But surely they have a much greater ability to contribute to the costs of rebuilding Queensland than families living on just $55,000 a year in non-flood-affected areas. Since some of the levy will be used to cover the costs of the Disaster Recovery Payment and Income Recovery Subsidy, the levy may well also end up diverting income from the poor to the rich.

There are, of course, a great many people who are very badly off as a result of the floods and in genuine need of assistance, particularly low-income households who thought they were insured against flood damage only to discover that they were not.

The federal government has yet to provide details as to whether part of the levy will be used to help those whose homes are uninsured against flood damage. If it does decide to do so, let us hope that it will distribute this money fairly between flood victims, that claims will be means tested, and that people will not be entitled to more compensation simply because their homes are more valuable.

In the Christchurch earthquake, homes that sustained little damage other than to antique furniture and artwork are nevertheless entitled to compensation (up to $20,000). The mechanics of New Zealand's earthquake fund are very different to the flood levy (it is paid for by pooled insurance premium contributions), but let us hope that no such claims for compensation will be entertained by either the state or federal governments: that aid will be directed to those most in need and that the levy will not penalise the poor to cover the losses of the rich.


The NSW political disaster

The retirement of Bob Carr has exposed how little talent there is in NSW Labor

THE first electoral test of the year will be on March 26 when NSW voters go to the polls. Kristina Keneally must know it is therefore only a matter of months before she is out of the state's top job, which is why some inside the Labor Party are canvassing the possibility of her switching to federal politics, moving into the seat of Kingsford Smith if Peter Garrett chooses to call it quits.

But the fact that Labor has been in office in NSW for 16 long years is not the only reason that it is lurching towards a sizeable defeat. Policy decision making (or sometimes a lack thereof) is at the heart of voter disillusionment with the NSW Labor government.

Just before Christmas that feeling was once again fuelled when Treasurer Eric Roozendaal authorised the sale of the state's electricity services. It was a fire sale, reaping just over $5 billion (but really only $3bn because one of the conditions of the sale was that the government purchase a $2bn coal mine).

Carr tried to sell electricity assets in 1997 for approximately $30bn but was overruled by Labor's state conference and Morris Iemma tried again in 2007 for half that amount but was also overruled (being toppled as leader as a consequence).

The cheap price tag of today is doubly galling for voters, especially considering the opposition is opposed to the sale and would have retained the assets at least until they were able to get a better price once elected.

Keneally is for all intents and purposes presiding over a caretaker administration. She had no business allowing such a controversial sale right before an election, certainly not considering that to make it happen the government had to replace nine directors from the boards of the public electricity companies because they refused to approve the plan, believing it was a dud sale.

Throw in the fact that the man most likely to take over the reins for Labor after the election is John Roberston, the former union official who scuttled Iemma's bid to sell electricity assets at a more reasonable price three years ago - and the political damage this issue has caused Labor may not end on polling day.

But electricity privatisation isn't the only controversial policy area in NSW. The release of land for development has been slow. The alternative policy of creating inner-city density has upset local communities who feel crowded out by too many home units in their suburbs. And the state's infrastructure has been allowed to run down, even with a late injection of funds courtesy of the federal government's Infrastructure Australia fund.

What we will find out when Barry O'Farrell becomes premier after the March election is whether the problems of Sydney are simply big-city issues that are unavoidable when urban sprawl reaches the level it has in Australia's largest city, or whether the problems can be addressed by good management and a rationalisation of government services.

If the former is the case the Labor Party just might recover quickly to become politically competitive in Labor's favourite state. If, however, the latter is the case and O'Farrell repairs Labor's mess, it could be a long wait in the political wilderness for the NSW Labor machine and that would also have federal implications.

Julia Gillard will be hoping that with NSW Labor out of power she will be able to rebuild Labor's brand in the commonwealth's largest state. But she might want to think again about that prospect, because with voter angst so strongly opposed to the NSW Labor brand, the federal party will need to be careful, given the number of names in its ranks who built careers in NSW Labor.


Aid goes in too many directions, says report

AUSTRALIA'S overseas aid is often fragmented, poorly directed and difficult to evaluate, according to an annual report on the effectiveness of the government's overseas development program.

The report, by AusAID's internal watchdog, the Office of Development Effectiveness, praised the aid program's "impressive reach … and effectiveness", but said there were significant structural problems.

"AusAID does not have an overarching strategy on implementing the aid effectiveness agenda and has not clarified how to report against aid effectiveness principles," the report says.

"It needs a strategy for reporting that sets out benchmarks and targets for country and regional programs in terms of aid effectiveness principles."

The report, covering 2009 but made public only recently, comes soon after the Foreign Affairs Minister, Kevin Rudd, ordered the first independent review of the aid program in 15 years.

A panel will assess whether Australia's $4.3 billion in annual aid is being spent efficiently and make recommendations to improve its structure and delivery.

Since his appointment as foreign minister after the election in August, Mr Rudd has emphasised that Australia's aid program must be defined by its effectiveness as much as the total spent.

In October the government announced the number of Australian aid advisers in East Timor would be cut by a third, saving an estimated $3 million, which will be redirected to new and existing projects. The cuts followed a similar overhaul of the aid program in Papua New Guinea.

The report says there is a tendency to funnel aid money through the recipient governments, ignoring grassroots organisations.

"Much of the aid program's knowledge of governance and the public sector is at the national level and there is little understanding of the complex system that determines whether services are actually delivered," it says.

It also says there is an increasing tendency for more, smaller projects, noting the number of bilateral aid projects tripled between 1996 and 2006, more than double the increase in aid.

"An increase in the number of small activities increases the burden on partner countries, which have to manage, co-ordinate and monitor aid contributions," it says.

"Australia and its partner countries have made commitments to address proliferation, however, the data suggest that to date there has been a lack of follow-through."


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