By David Hetherington and Dominic Prior
In the first decade of the century, Australia struck it lucky. A voracious global appetite for commodities meant that we could sell unimaginable quantities of our mineral resources at unimaginable prices. The result was a windfall to our public coffers of at least $180 billion over the six years from 2002 to 2008. To borrow a phrase from a prominent director of one of the big mining houses, it was “like being hit up the arse by a rainbow.”
To be clear, Australia had positioned itself cleverly to take advantage of such luck. Two decades of economic reform under Hawke, Keating and Howard had seen to that. But the material question is how we responded to such luck. How did we spend the windfall of our mining boom?
In this paper, we examine the ten years of Commonwealth Budget papers to answer this question. We chart the rise of the boom and its explosive impact on our federal tax revenues up until 2008. We see how tax revenues fell away dramatically in the face of the Global Financial Crisis, despite our terms-of-trade continuing to rise for a further three years. Our estimate is that the pre-GFC phase of the boom delivered at least $180 billion over and above long-term GDP growth trend.
What did we do with this bounty? Just over half of the windfall, $105 billion, was used by the Howard and Rudd Governments to shore up the fiscal position of the Commonwealth. We paid off $36 billion of sovereign debt and put $69 billion into long-term savings funds. This was the responsible course of action.
But the remaining $75 billion represents a big missed opportunity. The Howard Government gave at least $25 billion away in tax cuts and concessions, on everything from fuel excise to voluntary superannuation contributions. It used another $50 billion on inflated spending programs and various cash handouts, from the baby bonus to the First Home Owners’ Grants.
This profligacy had two damaging consequences. First, we missed the opportunity to invest $75 billion in long-term productive assets. We could have built a high-speed rail link down the east coast, or funded hundreds of thousands of skilled cadetships, or rolled out solar generation farms to power our mining and aluminium sectors.
More importantly for the future, we have created a huge structural problem for our budget. The combination of tax cuts and spending growth left Australia ill-prepared for a change in economic circumstances. Most of the tax and spending changes were presented to voters as permanent benefits. No-one imagined that our tax take could fall by four percentage points of GDP in the three years from 2008 to 2011. Yet when this happened, a structural imbalance appeared in our Budget which will take years to redress.
Voters had come to see the fruits of the boom years as entitlements, making it difficult for government to wind them back. The Gillard Government has begun this task â€“ by tightening means-tests for family benefits, introducing them for private health insurance rebates, and winding back superannuation tax concessions. But the process will take years and involve much political pain.
Australia had a great boom – it’s a shame we don’t have more to show for it.
*Quote on unexpected good luck from Sir Rod Eddington, former board member of Rio Tinto, City AM interview, Sept 2005