The federal government found an ally on a leading economist for its proposed flood levy, who declared support for the initiative and argued that the tax would hardly leave a dent on the Australian economy.

HSBC economist Paul Bloxham told AAP that the flood levy only accounts for one percent of the country's gross domestic product (GDP) and by itself is a reasonable instrument for the government to deal with the rehabilitation programs to be set in motion in the eastern states of Australia.

Overall, the recovery efforts would require some $5.7 billion and Prime Minister Julia Gillard is raising $1.79 billion of the amount through the 12-month period tax that would require middle and high income Australians to finance the levy.

Apart from the new tax measures, Ms Gillard said that spending cuts would be instituted by her government to realise savings of up to $4 billion, which won too the approval of Bloxham.

Bloxham downplayed fears that the flood levy will discourage consumer activities as he reminded that the temporary tax "will be taking from one group and giving to another, and that other group will be spending probably all of it."

In effect, the amount that would be taken from more affluent households will be channelled to a sector of the economy that is currently struggling, according to Bloxham.

He also lauded Ms Gillard for ensuring that budget cuts would only be applied on programs that carry less economic benefits, praising the government too for not allowing "he budget to bottom line slip, which is crucial for the full capacity operation of the economy."

Despite the expected slip for the first half this year, the HSBC economist said improvements will set in by second half and the government needs to focus on carefully supervising the turnaround, by which time inflation level will have risen due to ramp up reconstruction activities.

Rising food prices and insurance premiums should be caused for concerns for many economists, said Bloxham, and with a tightening labour market, the Reserve Bank of Australia (RBA) could be prompted to impose rate hikes twice this year, the first of which should come by the second quarter.