Benefits of the mining boom – where did they go?

David Richardson, a senior research fellow at the Australia Institute, has produced a paper which examines the implications of the recent mining boom in Australia in terms of its primary beneficiaries.
The paper says that the perception of most Australians is that the mining boom delivered “unambiguous” benefits for the Australian economy, including more jobs, exports, tax revenues and, for the majority of people, higher incomes.
Richardson asks if this really was the case? What he finds makes interesting reading. Whilst mining companies benefited from the boom (that is from the December quarter of 2004 up until the recent economic crisis) a large proportion of the increased revenue was spent on investment in new capacity, which went up by $30 billion.
Australian households and income earners across the board did not reflect any benefit from the mining boom. And anyone owning resource stocks would have benefited from the enormous paper gains but these had largely disappeared by the end of 2008. Where there were real gains these would have gone to the top 20 per cent of wealthy households where share ownership is concentrated.
It has become clear that some of the decisions made by mining companies at the peak of the boom became less viable when the good times ended. This will have “tended to reduce the present market value of the relevant company shares”, said the paper.
Richardson reports that as a result of the boom, revenue received by mining companies increased by over $60 billion, of which well over half, $37 billion, represented increases in company profits before interest and tax expenses. Another $20 billion represented increased input costs, including transport, business services, chemicals, fuels, construction and construction materials. Additional labour costs accounted for $5 billion and additional royalties to State Governments, $3 billion.
Profits in Australia grew as a result of the increased profits flowing to the mining companies but some of this growth occurred at the expense of non-mining profits, according to the paper.
It said the mining boom would have had a major stimulatory impact on the Australian economy but for two factors. First, the Gregory effect saw the exchange rate appreciate, which caused a contraction in the rest of the economy. Secondly, the Reserve Bank of Australia increased interest rates in an attempt to offset the stimulatory effects of the boom.
Estimates from the Australian Bureau of Statistics suggest that the terms-of-trade impact of the boom increased real income by over nine per cent. The paper examines the extent to which the two main sources of income in Australian households, wages and government income-support payments, were boosted during the period. The evidence shows that real wages increased at roughly the same rate after the onset of the mining boom as they did before it, aside from local effects in WA and Queensland.
Households on Government payments indexed to inflation received no real increase during this time and neither did pensioners receiving pensions indexed to wages, since wages themselves did not reflect any benefit from the mining boom.
What is also surprising is that Richardson’s work belies the commonly held view that the mining boom generated massive tax revenues for the Government, suggesting that it only contributed a fraction of the increased revenues.
“Overall, it is hard to identify the benefits to ordinary Australians of the mining boom,” said the paper. “It seems that the benefits of the boom barely went beyond the mining industry itself. Indeed, higher mortgages and other borrowing costs meant that many households were worse off as a result of the mining boom.”
For a full copy of the paper visit: www.tai.org.au
The Australia Institute is an independent public policy research centre funded by grants from philanthropic trusts, memberships and commissioned research.