1% tax on high pay a possible precedent for a cyclone levy, says Reserve Bank deputy

A levy imposed by the Australian government after Cyclone Yasi hit Queensland in 2011 is one precedent the Government could consider to help pay for the damage from recent floods, Reserve Bank deputy government Christian Hawkesby says.

Hawkesby said the central bank was in close contact with the Treasury which is understood to be weighing up options to prevent the rebuild from Cyclone Gabrielle blowing out government debt.

The Australian federal levy saw taxpayers earning more than A$50,000 (NZ$54,600) a year required to pay 0.5% of their income on top of their income tax to finance repairs from Cyclone Yasi, with those earning more than A$100,000 paying 1%, he noted.

That levy was imposed for one year and is believed to have paid for about a third of the A$5.6b cost of rebuilding Queensland’s infrastructure.

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The Green Party has instead floated the idea of a levy on big businesses’ excess profits to help with the cyclone costs.

Hawkesby said the contact with the Treasury helped ensure the bank had accurate information “in terms of what fiscal policies there are and how they fit into the picture of what we’re doing”.

But he believed it was “very early days” deciding what those policies would be.

The Reserve Bank expects to have much better information on the likely costs of the cyclone by the time it next reviews its monetary policy on April 5.

But there are hints it is leaning towards a view that the cost of the floods, including the floods that hit Auckland earlier in January, are more likely to be towards the lower end of some projections.

Finance Minister Grant Robertson has said the cost to the Government of the cyclone is likely to lie somewhere between the cost of the Kaikōura earthquake and a figure close to the $13b fiscal cost of the Canterbury earthquakes, but would be partly insured.

The cost to the Government of the Kaikōura earthquake was initially estimated by the Treasury at $2b to $3b.

Hawkesby said there was still a lot of uncertainty, but the cost of the flood damage to insurers was likely to be in the same order as that they faced from the Kaikoura earthquake, rather than the Canterbury earthquake “which was a much higher order of magnitude”.

People could expect insurance bills to rise, but the Reserve Bank was very confident about the stability of the insurance industry, he said.

“What we’re going to see here is higher reinsurance costs flow through to higher insurance costs.”

The Reserve Bank has warned the floods will increase inflation in the short term.

It forecast in its latest monetary policy statement on Wednesday, when it raised the official cash rate by 50 basis points to 4.75%, that inflation would only drop back to 4.2% by the March 2024 quarter, rather than to 3.8% as it had forecast in November.

Hawkesby said that so long as inflation expectations were coming back to 2%, the Reserve Bank could “afford to have a little bit of time for headline inflation to get there”.

“The key message is the direction of travel and the ‘core’ persistent components of inflation really turning and getting back to where they need to go,” he said.