Dog Days: Australia After the Boom (Redback) by Ross Garnaut Page B

for tax cuts or increased spending soon after it arrived. The resulting public and private spending increased the demand for Australian labour and supplies. The economy was already in full employment, so this in turn raised domestic costs and the real exchange rate. That forced the decline of other trade-exposed industries, which freed up the labour that had been employed in these industries. Every announcement of a new mine meant an unannounced closure or failure of a hotel or university department or winery or factory. This process continued until enough investment and production had been shrunk or closed to meet the demands that the higher expenditure was making.
    The higher real exchange rate reduced the profitability of resources production (as well as of all other trade-exposed industries). It therefore took away part of the increase in government revenue. But this economic value did not just disappear – the real purchasing power of Australian incomes rose with cheaper imports, and Australian consumption increased to unprecedented levels.
    Even with the higher exchange rate taking the edge off government revenues, the increase was remarkable. Corporate income tax receipts alone rose from $27 billion in 2002–03 to $65 billion in 2008–09. That was the high point in real terms: the revised budget numbers released in August 2013 showed that only $69 billion was expected in corporate tax revenue for 2013–14, which is one-eighth lower per Australian in real terms than five years before, in the midst of the global financial crisis.
    THE INVESTMENT PHASE
    The second phase of the resources boom saw capital expenditure on resources projects rise from historical averages of less than 2 per cent of GDP to more than 8 per cent in 2013. This investment contained a high proportion of imported goods and services, which reduced its impact on the Australian economy by perhaps a percentage point of GDP compared with the same amount of investment in other industries.
    The big rise in investment began in 2006, stalled for a year or so after the Great Crash, and reached a peak in 2013. The larger part of the increase in resources investment came after the Great Crash.
    Before the Great Crash, much of the increase was funded (directly or indirectly) by capital inflow. After the Crash, more was funded (mostly indirectly) from higher national savings. During this period, household savings increased, partly in response to the uncertainty and anxiety induced by the financial crisis and its long international shadow. Lower consumption reduced the demand for Australian labour, thereby freeing about half of what was required for the growth in mining investment from the Great Crash up to 2013. But the balance of the increase in investment – amounting to about 2 per cent of GDP – increased labour and other costs and therefore further pushed up the real exchange rate.
    The investment phase of the boom has affected the economy independently of government decisions on taxation and expenditure. It immediately and automatically increased demand for Australian labour and supplies. This has augmented the effects of spending the income from higher export prices in pushing up local costs as mining outbid other industries.
    The higher exchange rate made all of our trade-exposed industries less competitive – in the resources sector as well as in services, manufacturing and agriculture. So some of the investment choked off by the higher exchange rate was in resource projects that did not go ahead. Indeed, the bidding up of executive pay, labour costs and conditions, and land and materials prices in the frenzy of the boom meant that the resources sector experienced even greater cost increases in international dollars than other industries.
    Once capital expenditures have been made, investors are able to claim tax deductions for depreciation and amortisation and financing costs. The increased deductions are available over a number of years, eventually