Wednesday, May 31, 2006

Resource rich, resource poor Australian states

It is with an almost instinctual fear of ridicule that I applaud the NSW and Victorian State Governments for overcoming their debt phobia to embark on an infrastructure spending spree. Ignoring the specifics of what is to be done – the phobic attitude towards public debt has clearly gone too far in Australia. The timing of the debt expansion might not have been so great – coming after a 16 year national expansion corresponding to one of the most prosperous periods in Australian history – but, at least, two State Governments have overcome their phobias. And in one foul swoop they have resupplied a starved market for fresh, newly-created public Australian debt. The Australian online even features a video of this dramatic event.

The spending plans themselves are discussed capably in the press. I am far more interested in the Tale of Two Cities line of the Victorian Treasury suggesting that the resource poor states (Victoria and NSW) have suffered under the impact of the commodities boom which has kept the Aussie dollar high, dampening demand for manufactured exports in NSW and Victoria and resulting in lower economic growth in these states. Hence, a claim goes, the need for a fiscal expansion which addresses the disadvantage.

The disadvantage isn’t that great – about half a percentage point with aggregate Victorian growth still forecast by Treasury to be 3.25-3.5% for 2006/07 which is healthy enough but nowhere near Western Australia’s anticipated 5.25%. The Australian’s editorial today somewhat dramatically describes the split of our country into two sub-economies:

‘ AUSTRALIA is officially a two-speed economy. The resources boom is driving massive growth in states such as Western Australia, South Australia and Queensland, while the traditional leaders of the Australian economy – Victoria and NSW – are comparative laggards. Western Australia's economy is expected to grow by 5.25 per cent in 2006-07, compared with a forecast national growth rate of between 2.5 and 3.25 per cent. Its residents will soon enjoy the nation's highest per capita household incomes. Rents for offices in Brisbane's CBD now surpass Melbourne's and are starting to achieve parity with those in Sydney, an indicator of the Sunshine State's commercial vigor’.
It’s a dramatic development but hardly, in itself, a reason for an expansionary public sector budget deficit in resource-poor states. But we should be grateful they have overcome their debt phobias.

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