31 October 2011
3 min read

Dr Richard Denniss, Executive Director of The Australia Institute explains how the effects of the mining boom will affect Australia’s economy in the long term.

Much has been said about the changing face of the mining industry, where the effects of the boom have been both substantial and positive. But until very recently there has been far less discussion of the impact of the mining boom on the rest of the economy, including those areas which have suffered as a result.

While one might assume that any expansion in the mining industry simply adds to the overall size of the Australian economy, in reality the operation of the macro economy is far more complex. Indeed, much of the growth in mining comes at the direct expense of expansion in other parts of the economy.

According to the findings of a survey by the Australia Institute the average Australian thinks that 16 per cent of Australian jobs are in the mining industry and that 34% of GDP comes from mining. In reality only 1.9% of people work in mining and they produce less than 10% of GDP.

The mining industry has undergone a huge boom in the past decade with its employment surging from 78,400 in 2001 to around 210,000 today. To put that in perspective, however, there are around 22 million Australians. In Western Australia 88,000 people are employed in mining, and in Queensland it’s around 62,000 or put another way, 97% of Queenslanders don’t work in the mining industry.

Nationwide the mining industry employs slightly fewer people than the leisure and recreation services industry, around one third of the number of people who work in the community sector and about one fifth of those who work in manufacturing.

Of course the mining industry also creates indirect jobs – but there is much less acknowledgement of the indirect jobs that are also created when teachers, nurses and retail workers spend their earnings.

But while the mining industry is keen to claim credit for the indirect jobs it creates in other industries, it is not so keen to accept responsibility for the impact of the mining boom on the exchange rate and for the decline in employment in other industries.

As the world’s demand for our resources has boomed so too has our exchange rate which has risen from an average US$0.74 in 2004 to over US$1 this year. There has been much said about the potential impact of a carbon price on competitiveness but the increase in the exchange rate has been devastating for major parts of the manufacturing, tourism, education and agriculture industries.

The mining boom is also largely to blame for Australia’s relatively high interest rates. When the RBA increases interest rates its goal is not to slow down the mining industry but to slow down the rest of the economy in order to make room for the expansion of the mining industry.

This means that both small businesses with an overdraft and families with a mortgage are paying a high price for the big profits of the mining companies. The fact that 83% of those profits are actually paid to foreigners, like the fact that the mining industry pays one of the lowest rates of corporate tax, is strangely absent from the glossy mining advertisements.

So what, if anything, can government do to insulate the bulk of the economy from the surging exchange rate?

The government could broaden the base of its proposed mining tax to include, for example, the enormous profits being made by gold miners.

Having done so, if the government were to create a sovereign wealth fund which invested heavily offshore the short-term outflow of money would take some pressure off the exchange rate. By moving money offshore when the exchange rate is high, Australians will receive a substantial capital gain when the money is brought back onshore when the boom begins to bust.

They could also slow the rate of mining expansion. The mining industry is currently planning massive new investments in coal, iron ore, coal seam gas, and other mineral extraction.

The faster this expansion occurs the greater the pressure on our exchange rate and interest rates will be. That is, the faster the mining boom is allowed to proceed the greater the risks to the broader community will be.

The Australia Institute has published an analysis of the mining boom – Mining the truth: the rhetoric and reality of the commodities boom.