In widely reported censures by business leaders and economists, in warnings by politicians, public servants and journalists, we often encounter grim themes about the Australian economy. The mining boom accounted for Australia's apparent economic success in recent times, they say. But Australians wasted the boom through fecklessness and complacency, they continue, and the boom is now over. It follows that Australians face a bleak future as they adjust to falling commodity prices, falling mining investment, and a backlog of painful but necessary economic reform.
In Beyond the Boom I dispute all four propositions.
The investment phase is certainly beginning to wind down but the mining boom is not over – and in some important respects it has barely begun. Anyway, the mining boom does not explain Australia's long run of economic success. Australia's economy grew faster in the ten years before the boom began than it did in the ten years after, and incomes rose more rapidly. Exports increased much more in the ten years before the boom began than the ten years since. Over its first decade the mining boom saw an expansion of the resources sector by something like 3% of GDP and an addition to Australian income of something like 3% of GDP – both useful contributions, but much less than the imagined gain.
Nor has the mining boom been wasted. Household consumption, housing construction and home prices have all increased more slowly since the boom began than in the ten years before it began. By contrast, investment in physical capital and human capital and Australia's total capital stock have increased dramatically during the mining boom. Far from splurging the income gains from the boom, the increase in Australian saving since the boom began matches the income gain from the boom.
It is true that startling federal fiscal deficits opened up in 2009, and they persist today. But falling revenue as a share of GDP rather than rising spending accounts for most of the swing into deficit, with most of the falling revenue in turn explained by income tax cuts entrenched in the early years of the boom. Those cuts added to household saving, however, so that the increase in private saving during the boom years more than compensated for the fall in government saving.
This quite different take on where we are and where we have come from in the Australian economy can in turn usefully inform our views about where we go next. [fold]
Over the next few years we need to adapt to the decline of mining investment. But if the mining boom hasn't been quite as important to us as usually supposed, it will be easier for us to remain prosperous after the boom fades.
Looking beyond the boom, over the next few decades Australia can confidently build on a record of success rather than an alleged failure concealed by temporarily high prices for iron ore and coal. Instead of looking inward to identify the culprits for failure, Australia can look outward to identify the path of continuing prosperity. If we respond cleverly, the growth of the Asian regional economy can support the transformation of the Australian economy and the prosperity of Australians for decades to come.
Within a few years the growth of mining exports will peak and Australia will look to increased exports of farm products, advanced manufactures and (most critically) services to sustain prosperity. Its competitive advantage will not be cheap minerals, efficiently extracted, but the education and work skills of its people – its human capital.
As we rise to the challenge, domestic economic reforms can make useful contributions. It will help if we can encourage a more sensible public discourse on economic policy. The customary style of advocating economic reforms as urgently required remedies to avert catastrophe caused by decades of complacency has lost believability, as have claims for large general benefits for 'reforms' that mostly advantage one group of Australians over another.
To put the economic reform agenda back on track, we should make sensible claims for policies to extend and improve prosperity. Australia needs to develop a public discourse that can recognise the record and causes of its success, recognise too that the decisions of households, businesses and individuals rather than governments will determine whether success continues, and continuously adapt and improve the policy framework within which the economy operates.
Photo courtesy of Wikipedia.
