How we spent the mining bounty we should have saved
by Jim Minifie
Published by The Australian Financial Review, Monday 29 July 2013
It is 10 years since the start of the biggest mining boom in our history, apart from the 1850s gold rush. The boom has made us rich indeed. Australia has become the world’s biggest destination for mining investment, $400 billion being invested in the past eight years alone.
In the 12 years to last year, gross national income – the value of dollars in our pockets – rose by a massive 63 per cent.
But has everybody benefited? Some say that while the boom has been great for miners and mining states, it has left the rest of the country worse off.
Others worry the high dollar caused by demand for minerals has permanently damaged manufacturing and other trade-exposed industries. Others predict the boom will end in a severe recession, while yet others say the government has mishandled the boom by failing to save much of the windfall it generated.
A new Grattan Institute report, The Mining Boom: impacts and prospects, examines the effect of the boom on the economy and tries to ascertain whether the worriers are right. With one striking exception, it finds that they are not.
There is no doubt the boom has shifted the economy’s centre of gravity towards mining and the mining states. It triggered a currency appreciation that seriously hurt the profitability of the trade-exposed firms.
Partly as a result, the value of non-mining exports plummeted from just under 80 to 50 per cent of the value of Australia’s exports between the late 1990s and 2012. Half the value of Australia’s exports now comes from mining.
TRADE-EXPOSED SECTORS BETTER OFF
Nevertheless, the volume of goods and services produced in the non-mining sectors that are exposed to international trade is larger now than it was before the boom. Firms continue to invest in these industries. Despite the rush of money into mining, three-quarters of all business investment in Australia over the past decade has been in other sectors.
Certainly the boom boosted incomes more in Western Australia, Queensland and the Northern Territory. But in the past decade, incomes have increased faster in the rest of the country than in the decade before. Benefits have been spread across the country: regions have grown at different rates but few have been left worse off. While in the early years of the boom unemployment fell more quickly in the non-mining states than in the mining states, by last year the jobless rate in the two groups of states was almost identical.
By creating jobs in mining and construction, the boom has even helped to offset the impacts of globalisation and technological change on lower-skilled workers. Wages for technicians, labourers, drivers and machinery operators all grew faster during the boom than before.
And while the high dollar did make life hard for industries that compete globally, many were in the throes of change well before the boom, with lower-value sectors relocating to cheaper wage economies and Australia increasingly focusing on advanced services and high-skilled manufacturing. The boom only accelerated these trends.
Even the high exchange rate is not necessarily a long-term concern. The Grattan Institute studied countries comparable to Australia that had big rises and falls in exchange rates in the past. The historical trend is for manufacturing and service exports to flatline during temporary currency elevations. But in nearly every case, trade-exposed industries bounced back quickly after depreciations, and within a few years were back to trend.
BEST PROTECTION IS EDUCATION
Whether Australia faces a recession as the prices for its minerals decline is harder to say. Again, Grattan studied countries comparable to Australia that had big rises, then falls, in their terms of trade. Some fell into recession after their boom. Australia’s current boom is bigger than most. Yet Australia has avoided the traps in other mining booms, such as high inflation, and recession is far from inevitable.
One concern is well-founded, however. In the past 10 years the Commonwealth government has earned nearly $200 billion from the boom. It has not saved enough of it. Tax cuts and spending increases by governments of both main parties consumed more than 90 per cent of that bounty – far more than Australia can afford in all but the rosiest future scenarios. Underlying budget deficits must now be repaired in more difficult times.
Governments should resist the temptation to protect industries crying out for support. Protection merely penalises taxpayers and consumers while propping up uncompetitive businesses.
Instead, governments should strengthen policies and institutions that support stable growth. These include a monetary policy focused on keeping inflation low, a floating exchange rate, decentralised wage setting and low trade barriers. They should also invest in the skills and education of their citizens, by far the best survival tools in an ever-changing global economy; tools that will become even more important at the end of this once-in-a-century boom.