By David Hetherington and Dominic Prior*
In the first decade of the century, Australia struck it lucky.
A voracious global appetite for commodities meant that we could sell unimaginable quantities of our mineral resources at unimaginable prices.
The result was a windfall to our public coffers of at least A$180 billion over the six years from 2002 to 2008.
To borrow a phrase from a prominent director of one of the big mining houses, it was “like being hit up the arse by a rainbow.”
To be clear, Australia had positioned itself cleverly to take advantage of such luck. Two decades of economic reform under Hawke, Keating and Howard had seen to that.
But the material question is how we responded to such luck.
How did we spend the windfall of our mining boom?
In this paper, we examine the ten years of Commonwealth Budget papers to answer this question. We chart the rise of the boom and its explosive impact on our federal tax revenues up until 2008. We see how tax revenues fell away dramatically in the face of the Global Financial Crisis, despite our terms-of-trade continuing to rise for a further three years.
Our estimate is that the pre-GFC phase of the boom delivered at least $180 billion over and above long-term GDP growth trend.
What did we do with this bounty?
Just over half of the windfall, A$105 billion, was used by the Howard and Rudd Governments to shore up the fiscal position of the Commonwealth. We paid off A$36 billion of sovereign debt and put A$69 billion into long-term savings funds. This was the responsible course of action.
But the remaining A$75 billion represents a big missed opportunity. The Howard Government gave at least A$25 billion away in tax cuts and concessions, on everything from fuel excise to voluntary superannuation contributions. It used another A$50 billion on inflated spending programs and various cash handouts, from the baby bonus to the First Home Owners’ Grants.
This profligacy had two damaging consequences. First, we missed the opportunity to invest A$75 billion in long-term productive assets. We could have built a high-speed rail link down the east coast, or funded hundreds of thousands of skilled cadetships, or rolled out solar generation farms to power our mining and aluminium sectors.
More importantly for the future, we have created a huge structural problem for our budget. The combination of tax cuts and spending growth left Australia ill-prepared for a change in economic circumstances. Most of the tax and spending changes were presented to voters as permanent benefits. No-one imagined that our tax take could fall by four percentage points of GDP in the three years from 2008 to 2011. Yet when this happened, a structural imbalance appeared in our Budget which will take years to redress.
Voters had come to see the fruits of the boom years as entitlements, making it difficult for government to wind them back. The Gillard Government has begun this task – by tightening means-tests for family benefits, introducing them for private health insurance rebates, and winding back superannuation tax concessions. But the process will take years and involve much political pain.
Australia had a great boom – it’s a shame we don’t have more to show for it.
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*David Hetherington is the executive director of Per Capita, an Australian thinktank. Dominic Prior is an intern at Per Capita.
32 Comments
Its difficult not to agree that Australia has blown a good amount of the windfall, although I believe in different ways than the article suggests. As I have banged on about somewhat re New Zealand, the more important deficit for Australia has been its current account deficit. Despite the massive windfall coming from both huge quantities of minerals exported, and high prices for them, Australia has still had a persistently high current account deficit. So the benefits of the windfall by definition have gone offshore. I believe the cause of this, rather than government taxes or spending, is the high dollar, high interest rate; and free exchange rate with no controls policies of the RBA. They guarantee a significant current account deficit. In turn, foreign ownership- through debt or equity- is also guaranteed.
BHP and Rio Tinto for example I believe are now mostly foreign owned. The debt funding much of the other exploration and development has come from offshore.
And the high dollar has hurt the more traditional industries of farming and manufacturing, as well as tourism.
The New Zealand story with dairy and other soft commodity prices also being high, is not massively different, just not on the same scale; (and we had sold everything ealier). There should be a focus on the current account to ensure value and wealth stay onshore. The fiscal position determines how that wealth is shared around, and does put incentives or disincentives in place to encourage the right behaviour.
Ha ha, I absolutely love that quote! I am soooooo going to use it today. I don't know how, but I'm going to find a way....
Also, I'm not sure that I agree with the reasoning that encouraging Aussie families to have Aussie babies and then encouragine those Aussie families to own their own Aussie homes is a bad thing?
Is passing on massive windfalls to your citizens in the form of tax-cuts also a bad thing? Is investing in future pensions a bad thing? Doesn't really seem that way to me....
Sure, over time things change and the good times never last forever, but looking back and saying "oh, we could have had a high-speed railway instead of all these new little Aussie kids running around" doesn't really resonate with me!
Mind you, I wish they'd found some money to sort out the roads in Sydney. They're sh*t.
It's very much a matter of opinion isn't it? How much would a 'high speed rail link down the East Coast' cost in subsidies now (and forever more) if it had been built from the mining windfall profits for example? It reminds me of George Best's wonderful quote:" I spent 90% of my money on women, drink and fast cars. The rest I wasted". Personally the spending choices made by the Aussies over the last ten years seem pretty good to me.
Yes Stephen L, I agree with half your tale: ditto NZ agriculture and wood boom thats now had it for the time being. But not with your low dollar lobbying.When I was in short pants the NZ pound was beyond parity $US and the country then led the world by most indicators.
Ergophobia
We must have been in short pants at the same time. I accept the correlation between the high NZ$ at that time, and our relative strength in economic terms. I don't believe it was cause and effect though; rather a reflection of our guaranteed access to the British market in particular, with then high priced commodities. Muldoon then inflated away the difference, such that artificially getting the high dollar back without earning it, (but through other countries aggressive money printing, without us matching them) is very unhelpful.
The reason I champion a lower dollar, is that I would like to see a current account in balance; and a lower dollar seems the best way to give price signals to the market to buy NZ made rather than offshore made, at least to the point of balance. A positive current account by definition means we would be producing more of our own goods and services. It may be somewhat inflationary- at least for overseas produced goods and services, but again, that just may be the best way to manage price signals, while just a bit of inflation would actually get us through some debt situations better than deflation or stagnation.
A possible means to establish a lower dollar, also is to print some money, rather than borrow from or sell to the Swiss, Germans, Japanese, Chinese etc. I quite like all these people, but I don't feel obliged to keep running a charity on their behalf. (Which paying them interest that we could pay ourselves; or selling them cheap assets, is doing)
But, Ergo, if you know a better solution, I would be very open to it.
I think this might have a problem however, a lower doller might be nice to have, but its not necessarily going to solve your underlying issue. I think its also important what you do with that money used to create a lower doller anyway.
Wayne Goodley is one of two economists who predicted the financial crisis based on a model, and here there is something really important to say,
His Damascene moment occured when he realized that "measured in current prices, the government's budget deficit less the current account deficit is equal by definition to private savings net of investment."
The realisation being that these had been out of balance for a long time, and this lead to the conclusion that somebody had to default some time soon.
Nic,
Thanks, its a challenging read early in the morning, but seems to make sense. Given right now we have a large government and current account deficit; with plans to shrink the government one to zeroish by 2014, but expand the current account deficit by more or less the same amount, then we are heading for default, unless we put the brakes on overseas spending vs overseas income.
I fully accept a lower dollar won't magic away all our issues on its own, nor be painless. It seems a good start though, and the least painful way to share some pain, which would be limited given we would create relatively more activity onshore.
Have just checked a two week holiday in Queenstown in July vs 2 weeks in Hawaii. Hard to apples and apples the hotels, but Hawaii was just over half the price. Something wrong with those price signals while we have a large current account deficit.
Hey Andrew - how about digging out that 'gold approaching a waterfall moment' piece you were pushing the other day - you remember, the one where gold is imminently predicted to fall off a cliff ? That guy is one hell of a technical calls expert - watch what happens now as the shorts desperately try and cover their positions.
Gold priced in NZ$ is now a mere 6% off its all time highs at $2150 - never forget that gold bought in NZ$ is an excellent hedge against NZ$ falls........
Marc Faber talked on radio BBC this morning : He says the end game is still 5 to 10 years away ...... then , financial implosion !
.... that gives us oodles of time to sweep out the caves , and get a store of beans , matches & tea stowed away ....
Must remember where I stashed me homemade ear-wax candles .... didn't need them after the world inconveniently failed to collapse in 2008 , 2009 & 2010 ......
GBH well done:
http://www.bbc.co.uk/iplayer/episode/p00sd379/Business_Daily_Are_we_doo…
Thinking seems to be flush out, not bail out.
Otherwise just moving from crisis to crisis making the end event bigger and badder.
/collapse
GBH it must be your Oz experience - cotcha :)
16. bad·der, bad·dest Slang Very good; great.
http://www.thefreedictionary.com/Badder
As for Dr Doom, you can see why he lives where he does.
Oh we are not worthy, we are blessed to to be touched by your shadow...
upcountry Thailand
http://new.gloomboomdoom.com/public/pSTD.cfm?pageSPS_ID=5200
he has made a doom out of gloom...
Gummy - Marc Faber, my countryman used to own the railway station in Auckland and a few properties in Queenstown.
...and
Thanks....yet more ammo of a similar nature...
So one one end we have a no name davidB thinking (oh wait oxymoron moment) it wont be too bad....to ppl such as this and Foss etc who have got beyond thinking this to taking publically about an as bad as it could get.....
I know which ones Im going to listen to...
regards
Stephen L. It just seems to me that the two goals of having a sound economy and a low dollar are mutually exclusive. And to try by Walpolean means to favour certain oligarchs at others expense (there are two sides to every ledger - inflation for the plebs) is both wrong and doomed to failure. Real money will always follow quailty and so ever increasing subsidy (once again by plebs) will be required to hold the $ low. I do believe, now, that the Austrian School must one day prevail. Politicians and their toadies will have to get out of the way and we will end up with either an Amish or a Mad Max outcome.
Regards, Ergophobia
An interesting point, and pretty much with the exception of Norway indeed every other country wasted their windfall..........not sure how well it would have worked out mind....considering how much the likes of TB liked to hand out the money I really wonder.
regards
25/5/12 Dr Brash dishes out the meds to the Nats !
I don’t want to under-estimate the political difficulty of maintaining slow growth in government spending. The problem which the National-led Government has is that in the last few years of the Labour Government, that Government went mad with the cheque book – interest-free student loans, KiwiSaver subsidies, Working for Families, and all the rest. And, despite criticising most of those programmes in Opposition, National has left them all largely untouched. So between 2007/08 and 2010/11, while nominal GDP went up by $17 billion, core government spending went up by over $13 billion – absorbing nearly 80% of the increase in GDP. And almost none of that increase related to the Christchurch earthquake!
It’s worth noting that, despite what the Government calls tight restraint on government spending, over the last five years New Zealand has had one of the very worst reversals in its structural fiscal position, from surplus to deficit, of any developed country.
So now National is left saving five million here and 10 million there – chicken feed in the overall scheme of things, given core government spending is expected to be almost $74 billion this year. Indeed, despite this being described as a "zero Budget", core government expenses rise from $69.6 billion in the financial year just ending to $73.7 billion in the 2012/13 year, an increase of almost 6%, driven by the higher cost of New Zealand Superannuation, higher finance costs, and a transfer of some earthquake costs from this year to next.
Some points,
1) Don Brash had a night of the long knives on Act cutting out Hide, yet all but disappeared from the political spectrum when he got closer to zero votes (1%?).....(NB I recall some ppl in here predicting 10%+, the party that did that was the Greens). So lets take his opinion in context of the % of NZers that agree with him....a tiny %.
2) Lets normalise the data.
2a) So lets take out the cost of the earthquake as its a one off and cherry picking data....
2b) Un-employment has increased by some % points...2%? lets correct the Govn's "increases" by taking that out....
3) Super, yep and its going to double.....but I dont see DB's suggestion of a fix...the Cullen fund was one such good idea.
4) Higher finance costs, yeah and look at why.....in 2005 DB wanted to give out huge tax cuts to win power forcing MC to counter by expanding WFF....if on the other hand we had stayed as is, taxation would be higher and outgoings lower so less borrowings.....lets lay that fault where it deserves to be laid.
regards
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