Was the mining boom good for you?

Most pensions are now indexed to wages or the consumer price index, whichever is larger. The largest of these pensions, in terms of the numbers of recipients, is the age pension and the indexation arrangements allow the pension to increase gradually over time in line with community standards. This group did not receive any benefit from the mining boom because wages themselves did not benefit. As discussed above, wages increased by only 0.2 per cent, nowhere near the 9 per cent the mining boom might have been expected to deliver.

The remaining government income support payments, the allowances, are indexed and, as already pointed out, there has been no benefit passed on through that mechanism.

Some households would have benefited through their direct and indirect holdings of shares in mining companies such as BHP Billiton and Rio Tinto because of the large paper gains, up to 170 per cent in the S&P/ASX Resources index. Even at the end of December 2008, mining shares were still 57 per cent above their 2004 levels. However, share ownership is largely confined to higher-income households with the top 20 per cent owning 86 per cent of shares.

Share ownership is skewed even among those that do own mining shares. For example, Rio Tinto and BHP Billiton account for 51 per cent of the resources index; 67 shareholders, 0.13 of 1 per cent of shareholders, own 68 per cent of Rio Tinto while 78 shareholders, 0.01 of one per cent of shareholders, own 59 per cent of BHP Billiton. Both companies show a large number of small shareholders. Around 130,453 people, or 87 per cent of Rio Tinto shareholders, own just 8 per cent of Rio Tinto while 308,000 people, or 59 per cent of BHP Billiton shareholders, own just 4 per cent of BHP Billiton.

This proves that any gains accruing through share ownership would be strongly concentrated among a small number of wealthy shareowners.

While it is hard to identify any gains flowing to the majority of Australians as a result of the mining boom, it is possible to identify some negative impacts. The Australian dollar is often cited as a commodity currency, which means that its value tends to move with commodity-price movements. As a result of the strong increase in commodity prices, Australia certainly did experience an appreciation in the Australian dollar, by 31 per cent against the US dollar. The effect was to reduce Australia’s competitiveness in other trade-exposed areas, with manufacturing being particularly hard hit.

In addition to the exchange rate impacts, monetary policy was tightened significantly over this period. Most increases in the interest rate were explained, at least in part, by the increase in commodity prices. The new Governor of the Reserve Bank, Glenn Stevens, seemed especially keen to ensure that the mining boom did not spill over into the rest of the economy.

The result was higher interest rates that spread throughout the Australian economy far more widely than any benefits of the mining boom.

At their peak, higher mortgage-interest rates were transferring an additional $24 billion per annum, when compared with 2004, from the household sector, the equivalent of a 3 per cent reduction in living standards for households as a whole. New home buyers were the worst affected. For a new home mortgage of $300,000 taken out by someone on average weekly earnings, the increase in mortgage interest rates would have taken away 12.9 per cent of their post-tax earnings by mid-2008.

Some of the additional costs would have been returned in the higher deposit interest rates available on a limited number of deposit types. However, for most of the deposits that households are likely to use, interest is not paid or paid at trivial rates.

In fact the mining boom bonanza barely spread beyond the mining industry itself but the negative implications of the mining boom were felt very widely. This is important, in view of the current suggestions that the end of the mining boom implies that Australians will have to tighten their belts.

Symmetry should apply in the event of a slump in commodity prices. Just as the benefits of the boom were largely confined to the mining industry, the adverse effects of any slump in commodity prices should likewise be confined to the mining industry.