Business leaders get the wrong end of the stick

The release of the June quarter National Accounts has spurred a debate about the current pace of economic growth in Queensland and the steps that the state government should be taking to address the situation.

The Australian Bureau of Statistics (ABS) numbers showed that Queensland’s state final demand fell 3.3% when compared to a year ago. Undoubtedly, parts of the Queensland economy are experiencing tough times. Before potential solutions are identified, it is useful to identify exactly what the problem is.

The first important point to note is that the ABS figures are only a partial measure of economic activity in Queensland. They do not include trade (exports and imports), which means LNG, coal, minerals, beef and sugar exports are not counted. Neither are our tourism exports, the people who visit Queensland from overseas or interstate. These are important parts of the Queensland economy and need to be included to properly assess the State’s economic growth.

Queensland Treasury figures show that growth in Queensland’s net exports (exports minus imports) completely offset falls in state final demand over the year to March quarter. It is likely that, when a complete picture of the economy is available, it will show that exports made a large contribution to the economy again in the June quarter.

The second important point is that many parts of the domestic economy are doing quite well. Household spending and dwelling investment are contributing strongly to economic growth. The headline figure is being dragged down by sharply falling business investment, which is largely due to the wrap up of LNG construction in central Queensland.

Private engineering construction, which includes LNG and mining investment, has halved over the past year. As this category accounts for almost 10% of the whole Queensland economy, it has created a large drag on the headline numbers and had huge impacts on particular areas of the State.

It has been suggested that the Queensland government should try to boost growth by increasing infrastructure investment. Investing in productive infrastructure projects is a key way in which the government can increase the capacity of the Queensland economy.

But investing in unproductive infrastructure is not in the best interests of the State and could contribute to budget problems in the future. Do we really want to see our tax money spent on another school halls program? To fill the gap left by LNG and mining investment, the government would have to build the equivalent of four Clem7 tunnels every year.

In a similar way, an infrastructure investment package from the government is not a magic pill to create jobs and reduce the unemployment rate. One of the factors behind the recent rise in the unemployment rate is the reduction in mining and LNG jobs, which has seen many workers with very particular construction and engineering skills out of work. These skills do not easily transfer to other sections of the economy, including building roads and bridges.

Our state is adjusting to changes of unprecedented magnitude. The wrapping up of LNG construction has coincided with a large fall in Australia’s terms of trade that saw many large mining projects shelved. However painful the current transition may be, the flexibility of the economy is helping with the adjustment.

The fall in the terms of trade has been followed up by a fall in the Australian exchange rate. This will improve the international competitiveness of Australian products and services, increasing the returns of our exporters. It will also encourage more domestic and international travellers to visit Australia, providing a boost to our tourism industry. Low interest rates are encouraging households to spend and to borrow for housing investment.

So what should the government do to support the economy? As Synergies has previously noted (Pushing Ahead Insight Article), the only way to increase the long term prosperity of Queenslanders is to improve the productivity of our economy. Improving productivity performance means investing in productive assets, investing in human capital, promoting competition and improving technology.

Actions within the government’s control include sponsoring innovative thinking and action across the economy (including the public sector) rather than targeting specific sectors and rebalancing the tax mix to more efficient and equitable taxes. The government can also develop longterm infrastructure plans so that there is greater certainty about what productive investments can be bought forward and use utility prices to achieve sustainable usage and investment decisions while achieving social equity objectives through transfers.

Unfortunately, all of these options take time. They do not offer quick fix big bucks announcements but they are the best options for Queensland.