What’s with the NSW economy?

Tony Harris and I were discussing the issue of why the NSW economy has performed so much worse than the Victorian economy.

I’m not sure of the answer, though it seems to me that under both the ALP and the Libs Victoria has had better government – better leaders and a better bureaucracy.

Anyway Tony had written a column on it in January last year, so I asked him for a copy which is below the fold.

In each of the last two financial years, NSW recorded the lowest economic growth in Australia. It was the only jurisdiction not to record double digit growth over the last five years. For the eight years covered by the latest Australian Bureau of Statistics publication, it was the slowest growing state. This is not a trivial economic problem. It disadvantages NSW residents; it reduces Australias overall capacity to address social and environmental challenges.

Had NSW just grown at the average rate for Australia, its gross state product in 2005-06 alone would have been nearly $24 billion higher. That is a sizeable war chest to direct to state problems. Had the states per capita gross state product grown at Australias rate, a family of four would on average have been around $11,000 better off last year.

The first step to solving a problem is to acknowledge its existence. But the NSW government has made scant reference to the states persisting distressed position. In his budget speech for 2006-07 the treasurer, Michael Costa, said that NSW was experiencing good, solid rates of growth. Instead, as last weeks national accounts disclosed, the 0.8 per cent growth for NSW in the six months to December 2006 was again below Australias average. The Northern Territory and Tasmania were the only jurisdictions to perform more poorly.

The state government has belatedly offered several explanations for these dismal results including the drought, the strength of the Australian dollar – which militates against NSWs manufacturing and service sectors – and the decline in housing activity and housing prices partly caused by four consecutive interest rate increases implemented by the Reserve Bank.

But these factors – important to understanding NSWs cyclical drift – are not the cause of its structural economic decline. If the state has been disproportionately affected by the housing downturn, it ought to have recorded a singular advantage from the earlier boom. The high value of the Australian dollar has to be seen against the significant improvement in Australias terms of trade which advantages export industries represented in NSW.

In any event, the issues faced by NSW are more pressing for the Victorian economy. Compared to NSW, Victoria has a smaller mining sector and it has not been able to benefit from the boom for black coal. It has a proportionately larger manufacturing base to suffer from import penetration and it too is suffering from the drought. Like NSW, Victoria has been hurt by the commonwealths grant scheme which diverts funds from the larger to the smaller states. Yet Victoria has survived these imposts, experiencing better economic growth than NSW in six of the last eight years. For the six months to December, Victorias growth rate was nearly twice NSWs. To match Victorias results, NSWs performance would have had to have been about 50 per cent higher in each of the last eight years.

One of the possible contributors to NSWs economic decline is the role of the state government. After all, governments are quick to claim credit for good economic performance, so they might accept some culpability for poor outcomes.

It is widely accepted that NSWs infrastructure is deficient. One example is the queue of ships outside Newcastle waiting to load coal. These delays caused by inadequate port facilities have a cost borne by coal exporters and the state. The NSW government once tentatively agreed to the establishment of a second, privately owned coal loading port in Newcastle, but subsequent government procrastination thwarted its establishment.

The development of Sydneys road system has been marked by ad hoc decisions which have increased the cost of road development. NSW missed out on the massive inflow of resources which would have followed a privatisation of its electricity sector. Continued government ownership of major electricity generators frustrates the development of needed base-load, private generating capacity. The state has been a disastrous manager of its rural water assets – that is why NSW was the first to accept the commonwealth bid for the Murray-Darling. It has also mismanaged urban water. The governments obeisance towards unions – including in the electricity sector, policing, teaching and the public service – impacts adversely on efficiency.

The twelve year reign of the Carr-Iemma government has been marked by lack-lustre government and the absence of any worthwhile economic reform. Costas admission last week that the states taxation structure is weighted against business and requires change is a belated recognition of missed opportunities and lost growth. The state needs a government prepared to recognise NSWs economic ills so that it can commence real economic reform. This is the real task of whichever party is elected on March 24.

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13 years ago

The Victorian public sector likes to consider itself as the leader of all of the State bureaucracies at innovation, modernising and efficiency.

While these things are impossible to quantify, it’s pretty clear to any informed observer that across the board generally, NSW practices often aren’t up to scratch. Other States certainly do lead in many areas, but across the board Vic likes to be up there near the top. I don’t think it’s a coincidence Bracks pushed the national reform agenda.

I’ve recently completed an inter-governmental leadership and management Masters degree. It’s a generalisation, but I was surprised how old-school and backward looking many NSWalers were in their attitudes and approaches to things. Really 80s attitudes. Almost but not quite as bad as the Commonwealth ones. WA were real professionals, kiwis often innovators, other States a mixed bag.

Geoff Robinson
13 years ago

What is the ‘NSW economy’? Isn’t it a meaningless abstraction to talk about ‘state economies’ 100+ years after federation, are they are more than an arbitrary aggregate of economic activity presumed to take place within arbitrary lines on a map?

13 years ago

Not really Geoff. State governments can make a difference. Also, they’re overwhelmingly concentrated on the capital cities, so could be read as short-hand for (Newcastle, Sydney, Wollongong) and Melbourne (plus Geelong, Bendigo, Ballarat and the La Trobe Valley.

13 years ago

Are these growth figures really that different once corrected for population increase differences? It seems to me that at least some of Victoria’s growth is simply coming from a greater percentage increase in population. Apart from just having more people, I can imagine there is also a just-come effect, where people who migrate tend to bring in a fair bit of cash and need to spend some of it when they first arive. I realize there is an argument that people go where there is growth, but I think that some people came to Melbourne over Sydeny simply because it was historically cheaper to move to.

Jim Belshaw
13 years ago

Nicholas, starting from the premise that my views may be twisted. I am a New England new stater and have long wanted to bust NSW up.

Accepting that bias, I would put forward some suggestions.

First, NSW does not constitute a real geographical entity. It combines too many disparate interests, making a unified state view very difficult.

Take tourism. Tourism NSW Tourism NSW has two brands, brand Sydney and brand NSW. Sydney can be sold. But brand NSW is just too disparate.

Secondly, the political dynamics of NSW are very difficult at a number of levels. As a simple example, take the phrase “the Daily Telegraph test” This phrase, common in the NSW public sector, simply indicates the influence the Sydney Gold fish bowl has on state politics and on public administration.

Thirdly, consider the impact of averages and of the need to meet the greatest need in a disparate state.

Assume, for a moment that you have a social need. It does not really matter which one. Given Sydney’s size, the greatest need is highly likely to be there. So funds get concentrated. Other areas are likely to suffer when it comes to the rationing of scarce Government funds.

Then, too, the same thing happens when it comes to delivery mechanisms. Assume that you want to outsource something. The most likely candidates will be Sydney headquartered. Another area of the state may have over 50% of the need, I have an example in mind, but the delivery mechanisms will still end up controlled from Sydney. This has a variety of adverse effects.

Finally, the NSW Govrnment system has become extremely cumbersome and slow moving. Rather than going into detailed argument, let me give you a few symptoms.

NSW is a command and control, risk averse, system. I am not able to make detailed current omparisons with other jurisdictions. I only note thet the need to manage all form of risk dominates the NSW system.

NSW is one of the least transparent jurisdictions in the country, at least measured by the availability of information. I think that the state is the only place where you cannot find past press releases on line. Yes, as one of my journo friends said, you can find them at the State Library. But that is not a very efficient way to work.

I won’t go on at this point. There are other issues. But from my perspective I struggle to see how NSW might work.