Floods will be costly but won’t break us

With an estimated damages bill in the order of $1 billion (see this morning’s Australian), the Queensland floods will have a significant impact on the Queensland Government budget (already in a $1.75 bn deficit).  Of course, a large part of the damages bill will be met by insurers.  Furthermore, based on previous experience with Cyclone Larry, and current arrangements for cost sharing under the Natural Disaster Relief and Recovery Arrangements,  the Federal Government is expected to pick up at least half of the cost to taxpayers.

Under current Natural Disaster Relief and Recovery Arrangements, residents in natural disaster-declared areas are eligible for assistance, as noted in this media release yesterday from the Deputy Premier Paul Lucas:

Assistance for evacuated Theodore residents

The types of assistance provided include grants for personal hardship ($170 per person) and to cover the loss of household contents (up to $1,640 per adult) and to contribute to the repair of property damage (up to $14,200 per family) (see Financial assistance). Furthermore the Natural Disaster Relief and Recovery Arrangements provide funding for local councils to restore local infrastructure following natural disasters.

It’s unclear what the total cost to both the Federal and Queensland Governments of Cyclone Larry was, as the Budget Papers aren’t helpful in this regard, but the total cost is likely to have been over $500 million.  Following Cyclone Larry, Federal Government assistance included ex gratia payments of up to $1,000 for people who had lost their homes, and very generous assistance to affected businesses (incl. farmers) of up to $25,000 (see Australian Government Disaster Assistance and the 2006-07 Budget).  The business assistance alone cost the Federal Government around $260 million.

Given the widespread flooding and damage to houses (not all of which will be insured) and roads and bridges, it wouldn’t be surprising if the bill for taxpayers from the current floods is in the $500 million to $1 billion range.

It is highly likely the Federal and Queensland Governments are currently formulating a joint package of additional assistance measures in response to the floods and we will see an announcement soon.  Given the Queensland Government’s relatively poorer financial situation, it is likely the Federal Government will pay a big share of the bill for any additional assistance beyond the Natural Disaster Relief and Recovery Arrangements.

To put the potential budgetary cost of the floods in context, the Federal Government has an annual budget of over $340 billion.  While the Federal Government is also in deficit, its access to credit is very good, and it has been successfully borrowing $1.2 billion per week through its Treasury Bond auctions.  Hence, while the economic costs of the floods are undoubtedly substantial, as a nation, we will cope with them fairly readily.

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