Despite our patchwork economy, all states are sharing in the boom

Sharing the spoils: WA Premier Colin Barnett confers with Queensland’s Anna Bligh. AAP

The marked increase in international commodities prices and the accompanying rise in the value of the Australian dollar has led to popular concern about a two-speed or multi-speed economy, prompting the question: is everyone benefiting from our mining boom?

The high value of the Australian dollar has had deleterious effects on sectors such as tourism, tertiary education and parts of manufacturing industry.

But the regional effects of the commodities boom are very much ameliorated by income transfers for both individuals and state governments.

Measuring interstate differences

The most quoted measure of economic growth is the movement in Gross National Product measured at constant prices (real GNP) and, at the state level, real Gross State Product (GSP).

But these measures hide two offsetting factors.

First, states that grow faster have higher rates of population increase, either through movement from other states (Queensland) or immigration (Western Australia).

Interstate differences in growth are therefore narrowed when the more appropriate measure of real GSP per capita is used.

But, secondly, real GSP measures do not allow for the escalation in commodity prices.

For this we need to look at real GSP adjusted for the terms of trade which gives real state income per capita.

Over the last two decades, rates of growth in real GSP per capita were 2.4% per annum for Western Australia, 2.0% for Queensland and between 1.6% and 1.8% for all other states.

But these interstate differences in GSP per capita show marked cyclical movements. Most states have grown less than the national average in about half the number of years.

The exceptions are WA and Queensland, although even here these two states each recorded below average growth in six of the 20 years.

In Queensland the last three years have seen below average growth after population increases are allowed for.

The high prices for mineral exports are reflected in state differentials in real state income per capita.

Using this measure, WA was below the national average in only two years out of the last 20.

Clearly, WA has been the standout performer in recent years: in 2009-10 the nominal dollar value of its GSP per capita was 40% above the national average.

Transfer payments to individuals

Higher values of nominal GSP in a state do not automatically flow through to the residents of that state as higher levels of household incomes.

First, substantial foreign ownership in the resource sector means that some of the returns accrue to foreign residents.

Secondly, Australians in all states hold shares in resource companies, either directly or indirectly through superannuation funds, and benefit from dividends and capital gains.

Thirdly, the widespread use of ‘fly-in fly-out’ workers means that even some of the wages are paid to workers who are residents of other states.

Fourthly, federal income and company taxes combine with transfer payments to households to redistribute income.

The proportion of the population receiving commonwealth benefits in the six states varies from a low of 17% in Western Australia to a high of 27% in Tasmania.

The full extent of transfer payments is measured by household disposable income which includes social security and family payments and deducts income taxes payable.

Interstate differences in household disposable income per capita are very modest compared with the differences in GSP per capita.

In 2009-10 they ranged from 11% above the national average for Western Australia to 7% below for Queensland.

Transfers to state governments

There exist strong institutional factors that ameliorate interstate differences in the ability of state governments to provide government services.

Most importantly, the Commonwealth Grants Commission is charged with the responsibility of ensuring that GST revenue is allocated among the states according to the principle of fiscal equalisation.

In practice this is defined as ensuring that each state can provide a national average level of services if it operates at average efficiency.

In addition, general federal government expenditure is allocated in ways that tend to even out state income disparities.

Efficiency considerations

Although there are significant interstate differences in levels of activity, there are very strong institutional factors operating in Australia to even out economic differentials.

The resources boom is being spread across all states. Indeed, the equalising factors, by limiting the flow of resources, may be impeding efficiency.

This article draws on the June issue of Australian Economic Review at www.wileyonlinelibrary.com/journal/aere

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