SUBMISSION TO THE SENATE SELECT COMMITTEE ON STATE GOVERNMENT
FINANCIAL MANAGEMENT
RECENT DEVELOPMENTS IN STATE LEVEL ECONOMIC ACTIVITY
AND INFLATION
RESERVE BANK OF AUSTRALIA
The Australian economy is now in its 17th year of expansion, the longest uninterrupted period of
economic growth since reliable records have been kept. The expansion has been broadly based
across the states, with unemployment around multi-decade lows in all states and territories.
While growth rates in Western Australia and Queensland have been the highest in the country in
recent years, the divergences between the states narrowed somewhat over 2007, with high
growth rates being recorded in most states. In aggregate, growth looks to have moderated in
early 2008, and the slowdown has been broadly based across states.
Over the inflation-targeting period, CPI inflation has typically varied little between the states.
While inflation has generally been higher in the resource-rich states over the past few years, over
the year to the March quarter 2008 it was well above the target in all capital cities.
Details of recent state economic performance
There are a number of different indicators of overall economic activity at the state level.
Conceptually, the preferred and most comprehensive measure of state output is gross state
product (GSP). However, in practice the ABS does not regularly measure the interstate trade
component of GSP. In addition, GSP is only published annually and with a significant lag; the
latest data currently available are for 2006/07, reducing their usefulness as a measure of recent
developments in the state economies.
Given the limitations of GSP estimates, this submission focuses on state final demand to analyse
recent state economic performance. While there are benefits to using this measure, the most
obvious of which is timeliness, it also has statistical limitations. The most significant is that final
demand measures growth in spending, rather than output. This is problematic since in the states
where spending is growing fastest it is likely that some of that demand is being met by output
produced in other states.
Given the limitations with both GSP and state final demand data, we also look at other broad
indicators of state economic performance, such as employment data and business surveys, when
assessing the health of the state economies.
State Final Demand
Spending growth in the resource-rich states has been faster than in the rest of the nation for about
the past five years (Graph 1). This can partly be explained by the higher long-run population
growth of those states, but mostly reflects the stimulus from the run-up in commodity prices over
this period and the associated reallocation of resources.
2
Domestic demand grew rapidly in 2007, with growth remaining strongest in Western Australia
and Queensland. However, the gap with the other states narrowed somewhat, with growth rates
in final demand above their long-run averages in most of the non–resource states as well
(Table 1). Overall, the divergence in year-ended growth in state final demand across the states
returned to around its historical average in 2007 (Graph 2).1
Graph 1
State Final Demand
Year-ended percentage change
%
%
12
12
Table 1: State Final Demand
Year-ended percentage change
2007
1991–2007
average
NSW
4.5
3.4
Victoria
5.2
4.3
Queensland
7.2
5.4
South Australia
2.7
3.3
Western Australia
9.7
5.4
Tasmania
7.7
3.4
Resource-rich
states*
9
9
6
6
3
3
0
-3
0
Rest of
Australia
1996
1999
2002
2008
2005
Source: ABS
-3
* Queensland and Western Australia
Sources: ABS; RBA
Household sector
Household consumption growth increased in all states and territories over 2007, supported by
broad-based strength in employment and average wages growth. In the non-resource states,
consumption growth picked up from less than 2 per cent in mid 2006 to an average of 4½ per
cent over the year to the December quarter, while in the resource states consumption grew by
more than 6 per cent (Graph 3).
Graph 2
Variation in State Final Demand
Graph 3
Household Consumption
Standard deviation across states; percentage change
%
%
Year-ended growth
4
%
9
6
Average
Resource-rich
states*
120
6
100
3
4
2
2
1988
1992
Sources: ABS, RBA
1
Index, 2000 = 100
140
Year-ended change
6
0
Index
1996
2000
2004
0
2008
80
60
Rest of
Australia
1992
1999
2006
1994
2001
0
-3
2008
* Queensland and Western Australia
Sources: ABS; RBA
The variation in gross state product growth over recent years was smaller than the variation in final state demand
growth.
3
However, more timely indicators suggest that the pace of retail spending growth moderated in
the first quarter of 2008 (Graph 4). The slowing in growth was particularly marked in Western
Australia, which may partly reflect the significant cooling in the Perth housing market over the
past 18 months. Indeed, after a period of more rapid growth than in the rest of the country, retail
spending growth in the mining states was around the same as the average of the other states over
the year to February. There has also been a significant fall in consumer sentiment in all states
over recent months (Graph 5).
Graph 4
Retail Trade
Graph 5
Consumer Sentiment by State
Long-run average = 100
Year-ended percentage change
%
16
%
Index
16
130
Resource-rich
states*
Index
130
Qld
WA
12
12
120
8
8
110
110
4
4
100
100
0
90
0
Other states
-4
1990
1994
1998
2004
80
-4
2008
Australia
1998
120
NSW
Vic
2003
90
SA
2008 1998
2003
80
2008
Sources: Melbourne Institute and Westpac
* Queensland and Western Australia
Sources: ABS; RBA
After a period of significant divergence, growth in housing investment converged somewhat over
2007, as growth in Queensland slowed, growth in Victoria picked up and conditions in NSW
stabilised (Graph 6). More recent indicators of the housing market, such as new home sales and
building approvals, suggest a broad-based moderation in early 2008, as the impact of tighter
financial conditions is felt across all states (Graph 7).
Graph 6
Dwelling Investment
Index
Graph 7
Private Dwelling Approvals*
Year-ended growth
Index, 2000 = 100
%
No.
No.
Rest of Australia
140
30
10000
10000
120
15
8000
8000
100
0
6000
6000
-15
4000
4000
-30
2000
-45
2008
0
Resource-rich
states
80
Rest of
Australia
60
40
1991
1997
2003
1990
* Queensland and Western Australia
Sources: ABS; RBA
1996
2002
Resource-rich states**
2000
1988
1992
1996
2000
2004
0
2008
* 13-term Henderson trend
** Queensland and Western Australia
Sources: ABS; RBA
There have been significant divergences in house price growth across the major capitals
(Graph 8). The end of the boom in 2003 resulted in a significant slowing in price growth in all
capitals. Sydney was most affected, with average prices falling by around 10 per cent between
late 2003 and early 2006, before resuming modest growth in 2007. Perth prices were least
affected and subsequently reaccelerated, with overall growth of around 100 per cent between
mid 2003 and late 2006. Since then, prices in Perth have been broadly flat. Price growth in
Melbourne, Adelaide and Brisbane was relatively subdued between late 2003 and late 2006,
before picking up strongly to around 20 per cent over 2007.
4
Over recent months, house price growth has slowed and auction clearance rates have moderated
across the states, in the face of tighter financial conditions (Graph 9).
Graph 8
Australian House Prices
Graph 9
Auction Clearance Rates*
Level
$’000
$’000
Sydney
500
500
Perth
400
400
Australia
Melbourne
300
Adelaide
Brisbane
200
2002
2000
200
2004
2006
2008
100
%
70
60
60
50
50
40
40
%
300
100
Seasonally adjusted
Sydney
%
70
%
Melbourne
85
85
75
75
65
65
55
55
45
Sources: APM; RBA
1996
1999
2002
2008
2005
45
* Adjusted for withdrawals where possible; interpolated for January
Sources: APM; RBA; REIV
Business Sector
Divergences between the states have been perhaps largest in business investment spending, in
large part due to the extraordinary growth in mining-related investment spending in Western
Australia and Queensland. Nevertheless, business investment growth was relatively strong across
all the states over 2007, with the gap between growth in the resource-rich states and the
remainder of Australia narrowing as investment in NSW and Victoria recovered and growth
moderated somewhat in Queensland (Graph 10). Liaison reports that growth in business
investment remains strong into 2008, particularly for mining and infrastructure constructionrelated projects. Non-residential building construction activity also remains firm, although there
are some signs of moderation, as uncertainty over the macroeconomic outlook and tighter
financing conditions have begun to adversely affect firms’ investment plans.
Business surveys provide further evidence that the strength of the economy over recent years has
been broadly based among the states, with business conditions well above average in all states in
2007. However, there appears to have been a moderation over the first few months of 2008 in
most states (Graph 11).
Graph 10
Graph 11
Business Conditions by State
Business Investment
Index
Index, 2000 = 100
Year-ended growth
%
Net balance, deviation from long-run average
%
%
WA
Vic
240
30
20
15
0
20
Resource-rich
states*
180
0
Australia
120
Rest of
Australia
60
0
1991
1997
2003
1990
* Queensland and Western Australia
Sources: ABS; RBA
1996
2002
0
-20
-15
-40
-30
2008
-60
NSW
-20
SA
Qld
-40
1996
Sources: NAB; RBA
2002
2008
1996
2002
-60
2008
5
Labour Market
The broad strength in the economy is also evident in the state of the labour market, with aboveaverage employment growth experienced in all the states over recent years (Graph 12). Strong
labour demand has seen unemployment fall to around 30–year lows in all states and territories
(Graph 13). While unemployment remains lowest in the resource-rich states, the unemployment
rate has also fallen to very low levels in NSW and Victoria. Continued strong labour demand has
also contributed to increases in labour force participation rates (Graph 14). While the
participation rate in the resource-rich states has increased the most over the past few years, it has
also moved higher in all other states.
Graph 12
Employment
Graph 13
Year-ended growth*
%
Queensland
Western Australia
6
6
12
4
4
10
2
2
8
0
6
-2
4
-4
2008
2
Victoria
-4
South Australia
1999
2003
2007
2000
2004
8
South Australia
NSW
6
4
Western Australia
1992
1998
2004
1990
1996
2002
2
2008
* 13-term Henderson trend
Source: ABS
* Trend series
Source: ABS
Graph 14
Graph 15
Participation Rates
Merchandise Exports
Three month ended moving average
Volumes, seasonally adjusted
%
%
$b
$b
Western Australia
Resource-rich states*
68
68
Queensland
66
12
10
Queensland
Tasmania
-2
%
Tasmania
Victoria
NSW
0
Unemployment Rates*
%
%
20
20
15
15
66
Victoria
64
64
South Australia
62
62
10
10
NSW
60
Rest of Australia
60
58
58
5
5
Tasmania
56
56
1990
1995
2000
2005
1991
1996
2001
Source: ABS
2006
0
1989
1992
1995
1998
2001
2004
0
2007
* Queensland and Western Australia
Sources: ABS; RBA
Government Spending and Exports
Growth in government spending has been significantly stronger in the resource-rich states over
recent years, reflecting both increased demand for infrastructure and strong revenue growth in
these states. Growth in international merchandise exports has been relatively soft over the past
year in most states. The exception is in Western Australia, where exports have been boosted by
significant expansions in capacity, particularly that related to iron ore, LNG and petroleum
(Graph 15).
6
Migration Patterns
The strong economic performance of the resource-rich states over recent years has been
accompanied by a significant change in Australia’s migration patterns (Graph 16). Strong labour
demand has seen net inward migration to Western Australia increase significantly, primarily due
to a significant increase in net inflows from overseas. While there has also been a return to
positive net interstate migration, after the outflows seen in the first few years of this decade, the
flow remains relatively small, possibly due to Western Australia’s geographical isolation.
Queensland has also seen strong inward migration, with both interstate and overseas migration
significant, although net interstate inflows have slowed a little over recent years, possibly
reflecting a deterioration in housing affordability relative to New South Wales and Victoria. Net
inward migration to Victoria has also been significant over recent years, reflecting both a
reduction in the net loss of residents to other states and continued strong net inward overseas
migration flows. Net migration into New South Wales has been smaller, with continued robust
inward international migration in large part offset by significant outward interstate migration.
However, the rate of outward interstate migration has slowed somewhat relative to that seen in
2005. This may, in part, reflect the significant reduction in the premium between house prices in
Sydney and those in the other capital cities (Graph 17).
Graph 16
Graph 17
Migration by State
Sydney House Price Premium
Contributions to year-ended population growth
%
NSW
Vic
Qld
Ratio of Sydney Price to Rest of Australia
WA
Ratio
Ratio
1.8
1.8
1.5
1.5
1.2
%
1.8
1.8
1.6
1.6
1.4
1.4
1.2
1.2
Total
Overseas
migration
1.2
0.9
0.9
0.6
0.6
0.3
0.3
0.0
0.0
Interstate
migration
-0.3
-0.3
-0.6
19
90
19
95
20
00
20
05
19
92
19
97
20
02
20
07
19
94
19
99
20
04
19
91
19
96
20
01
20
06
-0.6
1.0
1994
1996
1998
2000
2002
2004
2006
2008
1.0
Sources: APM; RBA
Source: ABS
Inflation
Since 1993, there has been little variation in inflation rates across the capital cities, with average
annual outcomes ranging from 2.3 per cent to 2.7 per cent (Table 2, Graph 18). Not surprisingly,
over recent years inflation has been highest in the resource-rich states. However, over the year to
the March quarter 2008 there was only a small gap between the resource-rich and other states,
with all capital cities experiencing inflation well above the 2–3 per cent target.
7
Graph 18
Consum er Price Inflation by Capital City*
Year-ended, excluding tax**
Table 3: Annual CPI Inflation*
%
March quarter 1993 to 2008
%
5
5
Sydney
2.5
Melbourne
2.4
Brisbane
2.6
Adelaide
2.5
Perth
2.7
2
Hobart
2.4
1
1
Darwin
2.3
Canberra
2.4
0
0
All capital cities
2.5
Resource-rich states & territories
4
4
3
3
2
Rest of Australia
-1
* Excludes GST, where GST adjustment is assumed
equal across all capital cities
Sources: ABS; RBA
1993
1996
1999
2002
2005
2008
-1
* Regional weights based on the 15th series CPI
** GST adjustment assumed equal across capital cities
Sources: ABS; RBA
Graph 19
Consolidated State Budget Balance
Fiscal Position
Based on information from the most recent MidYear Reviews, the consolidated state General
Government budget balance is expected to be in
deficit by around $3.2 billion (0.3 per cent of
national GDP) in 2007/08 on an underlying cash
basis – following a deficit of $2.6 billion in
2006/07 (Graph 19). Looking forward, in
2008/09 the deficit is forecast to narrow
modestly to around $2.9 billion.
General government; per cent of GDP
%
Forecast
Underlying cash balance
%
0.8
0.8
0.4
0.4
0
0
Fiscal balance
-0.4
-0.4
-0.8
-0.8
-1.2
1982/83
1989/90
1996/97
2003/04
-1.2
2010/11
Sources: ABS; State Treasury Departments
The return to a consolidated state General Government deficit in 2006/07 predominantly
reflected a large rise in capital spending, mainly in Queensland, New South Wales and Western
Australia. This is in addition to large increases in capital expenditure by the state public trading
enterprises (Graph 20). However, despite this, net state sector debt is budgeted to remain
relatively small as a share of GDP over the forward estimates period (Graph 21).
Graph 20
Graph 21
State Public Non-Financial Net Debt
State Capital Expenditure
2007/08 mid-year budget review; fiscal basis
Per cent of GDP
$b
%
40
40
9
30
30
$b
Public trading enterprises
%
9
Public trading
enterprises
6
6
3
3
General government
20
Total public
sector
20
0
10
10
0
0
1998-99 2000-01 2002/03
2004/05
2006/07
Sources: ABS; RBA; State Treasury Departments
2008/09
2010/11
General
government
0
-3
-3
-6
-6
1992/93 1995/96 1998/99 2001/02 2004/05 2007/08 2010/11
Sources: ABS; RBA; State Treasury Departments
8
Attachment
Size and Characteristics of the States
As shown in Table A1, NSW accounts for almost one-third of national output, population and
employment, while Victoria accounts for around one-quarter of these variables. Consequently,
economic conditions in the two largest state economies generally have a significant influence on
national averages. However, average annual rates of growth in real output have been much
higher in Queensland and WA over the past three decades, so that the relative size of these states
has increased significantly (Table A2).
Table A1: Relative Size of States
2006/2007; per cent
NSW
Vic
QLD
WA
SA
Tas
Output share
32.2
24.3
18.8
12.8
6.6
1.9
Population share
32.8
24.8
19.9
10.0
7.5
2.3
Employment share
32.1
24.7
20.4
10.6
7.2
2.2
Exports share*
24.2
15.7
21.8
29.1
4.9
1.7
* Includes goods and services exports
Table A2: State GSP Growth
Annualised rate; chain-volumes; per cent
NSW
Vic
QLD
WA
SA
Tas
Aus
Since 1970/71
2.9
2.9
4.7
4.5
3.1
2.3
3.2
During current expansion
3.2
3.5
4.8
4.7
2.8
2.7
3.7
1991/92 to 2002/03
3.7
3.7
4.8
4.4
3.1
2.5
3.9
2002/03 to 2006/07
1.9
3.0
4.9
5.4
2.2
3.2
3.3
2006/07
1.8
2.7
4.9
6.3
0.8
2.1
3.2
In addition to substantial variation in their size and growth rates, states vary in their industry
structure. As shown in Table A3, the larger states of NSW and Victoria have a disproportionate
share of business services activity, reflecting the positions of Sydney and Melbourne as large
business and financial centres. Victoria is also characterised by a high share of manufacturing.
Primary industries remain important to Queensland, while WA remains distinguished by its large
resource sector. In South Australia and Tasmania, agriculture and manufacturing account for
higher shares of output than nationally, with the public sector also accounting for a relatively
large share of output in Tasmania.
9
Table A3: Industry Share of State Output
Per cent; 2006/07
NSW
Vic
QLD
WA
SA
Tas
Aus
1.3
2.3
2.8
2.1
3.4
5.4
2.1
20.3
23.0
27.6
45.5
26.0
26.3
26.1
2.3
2.0
7.9
28.6
3.9
2.7
7.0
10.0
12.5
9.3
7.3
13.2
13.8
10.2
Utilities
1.9
2.4
1.9
2.4
2.8
4.6
2.2
Construction
6.2
6.1
8.5
7.3
6.2
5.3
6.7
Goods distribution
14.6
15.5
17.2
13.3
14.2
15.0
14.9
Agriculture
Goods production
Mining
Manufacturing
Wholesale trade
4.9
5.5
4.6
3.5
4.0
3.5
4.6
Retail trade
5.5
5.5
7.0
4.7
5.9
6.7
5.7
Transport & storage
4.2
4.5
5.6
5.1
4.3
4.8
4.6
Business services
27.1
24.3
16.8
14.4
17.9
13.7
21.6
Communications
2.6
3.2
2.3
1.9
2.3
2.2
2.5
Finance & insurance
10.2
8.0
5.2
3.5
6.2
5.7
7.3
Property & business services
14.3
13.1
9.3
9.1
9.4
5.8
11.8
15.5
15.5
16.0
11.4
17.9
19.9
15.4
Accommodation, cafes & restaurants
2.3
1.6
2.7
1.2
2.2
2.4
2.1
Education
4.1
4.6
4.3
2.8
4.8
5.1
4.2
Health
5.7
6.0
5.7
4.7
7.2
8.6
5.8
Household services
Cultural & recreational services
1.6
1.6
1.2
1.0
1.5
1.6
1.5
Personal & other services
1.8
1.7
2.1
1.6
2.2
2.2
1.8
3.7
2.6
4.3
2.4
3.5
5.6
4.0
Government
30 April 2008