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State of the states

By Saul Eslake - posted Tuesday, 30 May 2006


There’s no doubt that the transition from residential property market boom to resources boom is altering the distribution of economic activity across Australia.

It is heightening talk about jobs, business and wealth moving from Australia's south-east, where the majority of the population lives, to the north and west, where the majority of the resources are located.

This picture of a two-track Australia has substance to it, but the reality is more nuanced than the assertion that Western Australia and Queensland are gaining at the expense of Victoria and NSW.

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WA is doing spectacularly well. After recession in 2000-01 (for the first time in 19 years), WA's economy has grown at an average annual rate of over 5 per cent and, according to the forecasts underpinning this year's state budget, will grow by an average of 4 per cent per annum over the next four years. Within the next two years West Australians will have moved ahead of residents of NSW and Victoria to have the highest average per capita household disposable incomes of any part of the country except the ACT.

WA's unemployment rate is down to 4 per cent and is projected to remain below 5 per cent for the rest of this decade.

Perth's housing market is booming, with average prices almost doubling over the past four years. Not surprisingly, the WA Government is in a very strong financial position, having become a net creditor two years ago and expecting a huge budget surplus this financial year, even though its operating expenses have risen by over 10 per cent per annum during the past two years.

Queensland is also doing well, with economic growth averaging 5 per cent per annum over the past four years and expected to continue at close to 4 per cent per annum over the remainder of the decade.

Queensland has generated nearly one-third of all of the new jobs created in Australia over the past two years, despite having less than one-fifth of the population; and its unemployment rate, traditionally above the national average, is now just below it at 5 per cent.

When Queensland's rapid population growth is taken into account, its economic performance is distinctly less impressive than WA's. Per head of population, its economy has grown by a full percentage point per annum less than that of WA.

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Average household incomes remain the second lowest in the nation, because Queensland is a low-productivity economy, with output per hour worked 13 per cent below the national average.

Queensland's mining industries are benefiting from high commodity prices, but its rural and tourism sectors are being hurt by the strong dollar.

The Northern Territory's economy has been weak for much of the decade, with growth averaging less than 1 per cent per annum between 2001-02 and 2003-04 and unemployment averaging nearly 6 per cent. But activity is starting to pick up, with economic growth expected to average 7 per cent this financial year and 6 per cent in 2006-07. House prices in Darwin are rising almost as fast as in Perth.

NSW, Australia's second-largest exporter of coal, might be expected to be a beneficiary of the resources boom. Yet it has become the lead in the nation's economic saddle bags. Its economy has grown by less than 2 per cent per annum over the past four years. NSW's unemployment rate is nearly 0.5 percentage points above the national average. Housing activity in the rest of the country is still running at levels comparable to the 1990s average; in NSW dwelling starts are down to less than two-thirds of the 1990s average.

NSW is more adversely affected by rising interest rates because its residents have on average bigger mortgages, and it was hurt more by the downturn in the IT sector at the beginning of the decade, but many of its current economic woes have been self-inflicted by the policy mistakes of the government led for a decade by Bob Carr.

Victoria has done well, considering that it derives few benefits from the resources boom, and its strengths in export-oriented or import-competing manufacturing and in export-oriented agriculture (such as wool and dairying) are vulnerable to the strength of the dollar, induced by the resources boom. Victoria's economy has grown by 3.3 per cent per annum, on average, over the past four years - slightly faster than the national average.

Over the past two years Victoria has accounted for one in every four jobs created nationally. Victoria's economy probably will grow a little more slowly than the national average over the next few years, but by a smaller margin than NSW.

South Australia has the world's largest uranium mine and Australia's biggest copper mine at Roxby Downs, but it otherwise has little to gain from the commodities boom and a fair bit to lose from the boom's impact on the exchange rate.

Its economy has grown at about 2 per cent per annum over the past four years, and its unemployment rate has drifted up by about half a percentage point to nearly 5 per cent over the past year. The population outflow to other states is accelerating. And South Australia's budgetary position, although much improved from the early 1990s, is also arguably the weakest of any state.

The exception to the weak south-east versus strong north-west dichotomy has been the performance of Tasmania. Its economy has grown by nearly 3 per cent per annum over the past four years, exceeding the national average. In per capita terms Tasmania's economy has grown faster than any other state except WA over the past four years.

But Tasmania's recovery also reflects a decade of something Tasmania has lacked for the preceding 30 years - good economic management at state government level. Tasmania has paid off what 10 years ago was proportionately the highest net debt of any state; and it has done so while being the only state not to have introduced any new taxes, or increased any existing ones, since the introduction of the GST.

Tasmania is Australia's poorest state, although by a smaller margin now than at any time since the late 1980s. Its challenge is to lift its bottom-of-the-ladder productivity performance and diversify its economy from commodity-based industries that lack the scale to be competitive.

For resource-rich states, the key challenge is to ensure that the fruits of the boom are not dissipated in wasteful spending. For the rest, a key issue is dealing with the consequences of an exchange rate that will undermine the competitiveness of their traditional strengths.

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First published in The Age on May 27, 2006. The complete article can be found here (pdf file 88KB).



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About the Author

Saul Eslake is a Vice-Chancellor’s Fellow at the University of Tasmania.

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