State of the states

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.