Wednesday, July 31, 2013

We got our cut from the resources boom

Do you realise you've been hearing about the glorious Resources Boom for the best part of a decade? To economists, it constitutes the greatest bit of good fortune to come Australia's way since the Gold Rush. To many of us, however, it hasn't sounded nearly so wonderful.

For one thing, there's that word boom. We know booms can't last. And aren't they supposed to end in bust? For those of us of a certain age, it's not the first commodity boom we've lived through - and the previous ones did end badly.

So a commodity boom is a big improvement in our income that, just as we're starting to get used to it, suddenly disappears, leaving us with a hangover. Great.

And then there's the word resources. It leaves many of us feeling uncomfortable. We were never all that impressed by making our living growing things in the ground and selling them to foreigners, but digging up part of our ground and shipping it overseas seems even more primitive.

Is that the best we can do after 200 years of development? We send our children to school and university for that? How long can we get away with that? Obviously there's a limit to it. Won't it leave us high and dry?

I suspect many of us have drawn perverse satisfaction from the recent pronouncements that the boom has ended. At least the hoopla's over and we're getting back to reality. Time for the reckoning - and the recriminations.

What have we got to show for all that fuss? I'm sure some people must have benefited, but I know I didn't. Surely we should have saved more of that windfall rather than frittering it away on high living? And what do we do for an encore? Haven't we destroyed our manufacturing sector in the process?

These fears are examined in a report by Dr Jim Minifie, of the Grattan Institute, published on Monday. It makes reassuring reading.

If you don't work in mining, or live in Queensland or Western Australia, it's easy to conclude you've seen none of the benefits from this supposedly fabulous boom. But that's because people are conscious only of the benefits that come directly. The trick is that, when we all live and spend in the same economy, the benefits get spread around.

For most of us, the benefits have been indirect, but very real for all that. For instance, many people don't count the high dollar - and its cheaper prices for overseas holidays and other imports - as part of their gain from the boom.

Minifie finds that while people in the mining states did better, those in the non-mining states didn't miss out. Between the 2003 and 2013 financial years, wages rose by 2.7 per cent a year faster than inflation in the mining states and by 1 per cent a year in the non-mining states.

When you switch to looking at income per household, the ratio improves. Household income per person rose by a bit less than 4 per cent a year in the mining states and by 2.4 per cent a year in the non-mining states. Household incomes in the non-mining states grew significantly faster during the boom years than in the previous seven.

Unemployment didn't differ greatly between the mining and non-mining states. They began the period at much the same rate and ended it much the same.

Minifie finds that some regional centres did better than others through the boom, but among centres hit by the high dollar, most still experienced rising employment, thanks to steady economy-wide growth.

Only 14 towns, with a combined population of just 600,000, experienced falls in employment as a share of population, with no town losing more than two percentage points.

We keep hearing that the high dollar has "hollowed out" our manufacturing sector, leaving it incapable of recovering once the dollar comes down. (Tourism and some other industries have been equally hard hit, but no one worries about them.)

Despite a decline in employment in manufacturing, Minifie finds its output didn't fall, mainly because of increased demand from the resources sector. And although its exports fell overall, exports of more sophisticated manufactures grew.

"The experience of other countries that have been through a big shift in exchange rates suggests that Australian manufacturing is unlikely to have suffered permanent damage," he says. "If exchange rates decline, manufacturing is likely to bounce back to [its longer-term rate of growth] within a few years."

Much has been made of Minifie's finding that successive federal governments - Liberal and Labor - saved very little of the higher tax collections they enjoyed as a result of the boom. They gave away most of it in income-tax cuts (thereby improving your standard of living).

But despite the media's efforts to convince you otherwise, the federal budget is not the totality of the economy. Nor did all of the benefits from the boom go solely to the federal government.

The broader picture is that, as a nation, we have saved a high proportion of the proceeds from the boom. Greatly increased saving by households, and increased retention of earnings by companies, have more than outweighed the reduction in saving by governments.

The nation's overall saving rate is now about 3 per cent of national income higher than it was, equivalent to about $50 billion a year. Why are we so easily convinced we're losers?