http://www.theaustralian.news.com.au/business/story/0,28124,24798770-643,00.html
Boom states now face the toughest problems
David Uren, economics correspondent | December 15, 2008
AUSTRALIA may continue to run a two-speed economy, but it will be the resource states that run slow as Queensland and Western Australia supplant NSW as the Rudd Government's biggest economic headache.
The resource states have gained from massive increases in business investment, mining royalties and payroll tax receipts. Booming housing markets lifted their stamp-duty revenue streams.
The reversal that is under way will take time to gather momentum, but will push state budgets into significant deficits, raise unemployment and elevate tension between the states over the distribution of GST.
There will be political implications for the federal Government as the downturn in Queensland gathers speed in the next 18 months. Queensland delivered 40 per cent of the Rudd Government's gains in the last election, whereas it went backwards in Western Australia.
Last week's Queensland budget update was too optimistic, providing little hint of the hard path ahead. It tipped that growth would continue to exceed national averages with only a temporary dip in tax revenue this year. Mining royalties, which leapt from $1.4 billion to $4 billion this year as coking coal prices tripled and thermal coal prices doubled, are expected by Queensland's treasury to fall by 20 per cent next year with a maximum 30 per cent decline over the next three years. This is not credible.
Not only are coal prices likely to reverse all this year's gains, and probably some of the previous year's as well, but volumes will also be reduced.
Commodity prices are around the level they were in 2004. If they stabilised at current levels, it would imply a 45 per cent fall in the terms of trade over the next year. With the dimensions of China's downturn still sinking in, there is every likelihood commodity prices will fall much further.
The commodity collapse will bring big falls in the mining and construction industries. At present, there is just over $50 billion in mining projects either under construction or committed.
The Government and Reserve Bank have been assuming most of the projects under way will be completed.
But Rio Tinto's announcement last week that it would halve its $US9 billion capital spending budget next year means many projects will be halted.
Rio is still in the process of spending $1.9 billion expanding its Yarwun alumina refinery in Queensland, $1.7 billion on the Argyle diamond mine, $1.5 billion on the BS4 iron ore project in the Pilbara, and $900 million upgrading the Cape Lambert iron ore port. Until the middle of last year, construction and mining industry employment was growing at more than 7.5 per cent a year. Those industries boosted the WA economy by 18 per cent over the last four years and Queensland's by 15 per cent, while NSW rose 6.5 per cent and Victoria 8.5 per cent.
As the fastest-growing industries in Australia become the fastest-contracting, the resource states will not just come back to the pack but drop behind it. Their unemployment rates will rise higher and their household consumption fall lower.
There are already a few signs of the downturn creeping into the numbers. The ANZ's job advertisement survey, released last week, showed a 28.3 per cent fall in Queensland in the past two months and a 27.5 per cent fall in WA. There were also falls in NSW (18.9 per cent) and Victoria (22.1 per cent).
Both retail sales and housing finance are weakening more rapidly in both WA and Queensland than in Victoria and at a rate similar to NSW's.
The housing dynamic is more worrying in the resource states than it in the southeastern states. Both had bigger and later housing booms.
House prices rose because of increased availability of credit, not because of increasing numbers of purchasers, and will fall as credit availability is tightened.
State governments are suffering from sharp falls in stamp duty as owners hang on to their properties rather than sell them at a loss. But the number of properties for sale is increasing and as unemployment rises, distressed sales will force prices lower.
The resource states face worsening financial conditions. Both Queensland and WA have committed to large infrastructure programs to be supported with debt funding. Both will soon find their operating budgets also in deficit.
To compound their problems, the Commonwealth Grants Commission works with an averaging formula which means that for the next three years, Queensland and WA will receive less than their per-capita share of GST revenue because they are deemed to have superior access to mineral royalties. They will be subsidising NSW and Victoria.
The Commonwealth has been tardy in recognising the severity of the states' financing difficulties, created by the guarantee it offered to banks. And in the wake of the bond issues by the banks last week, there were no bidders for state government bonds. Unless the commonwealth is prepared to step in and start raising funds on behalf of the states, the states will have trouble financing deficits and will have to raise taxes.
As it deals with resource states that are lifting taxes and cutting services, while households battle rising unemployment and falling real incomes, the Rudd Government may look back with nostalgia at the high poll ratings its economic management brought it at the end of 2008.