Leadership

How Would You Stop the Two-Speed Economy?

By Phil Dobbie

Updated on: September 2, 2010 / 11:11 PM EDT / MoneyWatch

Australia is an economy running at two speeds. The more successful the mining companies are, the bigger the divide. Do we say good luck to them and hope the rewards will flow through to the rest of the economy, or should we try and reduce the differential?
It looks like one of the main reasons Kevin Rudd is sliding in the opinion polls is opposition to his mining tax. His biggest mistake was calling it a tax --- it's really a payment for goods. No one in their right mind would suggest that mining companies extract publicly owned resources without paying something for them. Would you allow someone to dig up your vegetable patch and take out your cauliflowers and potatoes without paying a fair price?

The issue seems to be that the government now wants to charge the miners more depending on how successful the company has been at extracting that product from the ground. The popular opinion of late seems to be that this is a grab for cash, but there's more to it than that.

There is no doubt Australia is an economy running at two speeds. Western Australia and the Northern Territory each have a gross state product of around $70,000 per capita --- in each case mining accounts for almost a third of the state/territory's income. In NSW and Victoria the gross state product is well below the $55,000 mark and the differential has been steadily increasing over the last decade.

So, does a two-speed economy matter? Won't we see the benefits of the mining boom trickle down to other sectors. Perhaps. Trickle is certainly the right word to use, but how much hurt will the rest of the country feel in the meantime?

Since 2003:

BHP shares have risen five-fold, whilst the ASX 200 has risen just 63 percent.
Perth (established) houses are 2.3 times more expensive, compared to a 23 percent rise in Sydney houses (where most growth has been since March 2009). In fact, Perth housing notably outperformed the ASX200.
Average household income in WA has gone from 3 percent below NSW, to more than 5 percent higher.

So, if we accept that there is a two-speed economy, the next question is, does it matter? If you own a Perth house and have substantial mining investments you'd say not. If you are struggling to buy a house there you'll have a different view. The same applies to those across the country whose cost of living and mortgage rates are being driven higher, possibly because of wage push inflation and confidence in the economy.

To counter these impacts surely the notion of taxing high-end resource profits will help provide some equilibrium. The revenue will, in part, reduce tax across the board and increase productivity in other sectors.

Anyone got a better plan? Do we just maintain the status quo and wait for the benefits to trickle through. Or do we really believe the mining sector is already helping all of Australia? Tell us what you think in the Talkback section at the end of this post.