State Hit By Resources Boom

The Age

Wednesday July 16, 2008

By Tim Colebatch, Economics Editor Canberra

AUSTRALIA'S resources boom is leaving Victoria worse off, modelling by federal Treasury has concluded.

A Treasury working paper released today finds that even a modest resources "shock" that lifts GDP by just 0.3% would cut Victoria's output by 0.1% and employment by 0.7%.

While it would lift the real buying power of wages throughout Australia, even a small resources boom does significant damage to manufacturing, Victoria's specialty, and the flow-on effects also damage retailing in the non-boom states.

The paper, "Structural effects of a sustained rise in the terms of trade," by Adam McKissack, Jennifer Chang, Robert Ewing and Jyoti Rahman, tests economic theory on how resource booms change an economy with Australia's experience since 2003.

Mostly, it finds the theory stacks up well. As it predicted, incomes have risen everywhere, but mostly in mining. The profits share of GDP has risen, and the wages share has fallen. Investment in mining has soared. Labour has moved into mining. And the dollar and interest rates have climbed.

In three areas, however, Australia's boom has been different from what the theory teaches. Manufacturing output and employment have not fallen, but have muddled along showing a little growth. Victoria and South Australia do not seem to have recorded much damage. And there has been little migration of workers into the boom states.

The authors concede that, in part, this reflects the reality that few people move interstate because wages are slightly higher. With all states recording official unemployment rates below 5%, they do not need to.

A sustained resources boom, the authors estimate, would require more than 500,000 people to shift to Queensland and WA by 2010-11, far above present migration rates. They warn that this raises the risk of inflation developing in those states as firms compete for scarce workers by offering ever-higher wages.

Treasurer Wayne Swan said the paper "highlights the importance of the Rudd Government's agenda to invest in future economic capacity, particularly by boosting labour supply and mobility - which is why the work to harmonise (occupational) regulations across states is so important."

The paper says the Government will face pressure to use boom revenue to cut the "adjustment costs" to non-boom regions such as Victoria. "The challenge is to provide support in such a way as to aid the necessary adjustment," it warns.

© 2008 The Age

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