With its rich endowment of natural resources, coupled with strong demand for minerals from emerging countries, particularly China, Australia is poised to embark upon strong economic growth. The possible consequences of this growth and how the Government can try to manage it to the benefit of the community are outlined in ‘Statement 4: Opportunities and challenges of an economy in transition’ in Budget Paper No. 1. In particular, Statement 4 distinguishes between mining boom mark I which commenced in 2003–04 and continued until the global financial crisis, and mining boom mark II which Australia is currently experiencing.
The following are interrelated features of mining boom mark II:
- the terms of trade are high and are expected to remain so for a considerable period
- appreciation of the real exchange rate as commodity exports rise
- pressure on some domestic manufacturing and trade-exposed sectors
- parts of the non-tradeable services sector such as road transport are likely to grow relatively slowly, and
- sectors aligned with mineral resources are showing promising signs of growth.
Mining boom mark II shares the above features with mining boom mark I. However, boom mark II differs from mark I in several ways including:
- the economy is now operating closer to full capacity. Thus there is less room for further expansion before price and wage pressures emerge
- access to credit is now tighter for business, and consumers are cautious and saving more. This has contributed to a ‘patchwork economy’ whereby performance in the mining and non-mining sectors is diverging, and
- while the terms of trade are now at expected peaks and likely to remain high for some time, falls are in prospect. Consequently, the surge in growth and government revenues that occurred when the terms of trade increased in mark I will not be repeated in mark II.
Consequently, while tax receipts grew at approximately 11 per cent per year during mark I, they are expected to grow at around seven per cent per year between 2012–13 and 2014–15.
These features raise the question of how the Government can and should respond to the boom.
Spreading the mining boom dividend and easing its fallout
The Government has adopted several measures to capture the benefits of the boom and ease pressures on adversely affected sectors. They include:
- the proposal to return the Budget to surplus
- supply-side (capacity-expanding) measures such as investing in infrastructure, improving skills, and expanding the labour force through increased participation rates
- increasing productivity through tax reform. Proposed tax measures include introducing a mineral resources rent tax and cutting the corporate income tax. The Government also proposes to increase the superannuation guarantee rate from nine to 12 per cent.
Some commentators have argued that a sovereign wealth fund, funded from the increased tax receipts generated by the economic boom and the proposed MRRT, would help ease pressures arising from the mining boom, and share current gains across generations. However, the Government has indicated that it prefers to encourage savings in superannuation funds and its other initiatives outlined above, rather than create a sovereign wealth fund.
While such measures may help the economy to adapt to the mining boom, the ability of government to affect the course of events is limited. For example, short of changing the exchange rate system, many of the consequences of the mining boom for non-mining sectors will flow from the appreciation of the exchange rate. Consequently, there will be considerable pressure on some non-mining sectors to adapt and some are likely to contract.
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