Deputy PM warns Australian economy could shrink

[February 08, 2011]  CANBERRA, Australia (AP) -- Australia's deputy prime minister warned Tuesday that extensive flooding and storm damage could shrink the economy, as he prepared to seek legislative approval for a new tax to pay for what could be the country's costliest natural disaster.

Deputy Prime Minister Wayne Swan, the government's ranking financial minister, told The Australian newspaper that there could be a $7 billion collapse in coal and farm exports as a result of recent flooding and a cyclone last week.

He said that could cause the economy to shrink in the first three months of this year, in what would be the first contraction of Australia's economy since 2008.

"There is no doubt that the natural disasters will thump our economy in the first quarter," Swan said.

Officials estimated last month that weeks of flooding in Australia's northeastern state of Queensland would cost the government at least $5.6 billion. The added cost of Cyclone Yasi, which struck the Queensland coast last week, has yet to be calculated.

Swan's spokesman, Adam Collins, confirmed his comments.

On Thursday, Swan plans to introduce a temporary flood tax bill to Parliament that would raise $1.8 billion over a year to help pay for railways, bridges, ports and other installations damaged by the flooding.

The government will need the support of at least three independent lawmakers and one from the minor Greens party to pass the tax bill through the House of Representatives because the major opposition party opposes any new tax.

Opposition leader Tony Abbott said Tuesday that the government should find money for rebuilding Australia by slashing spending by $2 billion, including cutting $400 million in foreign aid to Indonesia to build schools.

"With so many schools destroyed or damaged in Australia, we do think that charity begins at home," Abbott told reporters.

The government has said that the flooding alone -- which claimed 35 lives and damaged or destroyed more than 35,000 homes -- could prove to be the nation's most expensive natural disaster.

With Parliament sitting on Tuesday for the first time since the disasters, Prime Minister Julia Gillard wept as she expressed condolences for the flood victims and pledged the nation's support to rebuilding efforts.

"This summer will always be remembered for the force and scale of the natural disasters the nation has endured," she told Parliament.

She also referred to wildfires in Australia's drought-stricken southwest where 68 homes were razed this week on the outskirts of the Western Australia state capital Perth.

Australia scraped through the global economic crisis without a recession, thanks largely to continuing demand from Chinese and Indian manufacturers for Australian coal and iron ore. The economy recorded a single quarter of mild contraction at the end of 2008.

The government predicted in November, before the floods, that the economy would grow by 3.25 percent in the current fiscal year ending June 30.

Australia's central bank predicted last week that the economic slowdown would be short term, with growth from April to June likely to rebound through increased coal exports and reconstruction spending. The Reserve Bank of Australia's prediction was calculated before the cyclone.

[Associated Press; By ROD McGUIRK]

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