Mining Boom Bodes Bright Future for Australia

Australia’s GDP growth projected to be 3–3 ½ percent in 2010, 2011

Managing mining boom set to be major challenge

Use of fiscal policy, tax reforms, reserves to avoid overheating

Unlike many other advanced economies, Australia managed to escape recession following the global downturn, and GDP growth is projected to be 3–3 ½ percent this year and the next.

The country’s recovery is being driven by a mining boom, with private investment in mining and commodity exports taking over from public demand as the main driver of growth.

“We expect the terms of trade to rise to historic highs in late 2010, driving a mining boom that is likely to be long lasting and could permanently raise household incomes,” said Ray Brooks, the IMF’s mission chief for Australia.

“The positive challenge for Australia is now to manage that boom while avoiding inflationary pressures,” he added.

Managing the boom

The country is benefiting from rebounding commodity prices in its key exports, such as iron ore and coal, with China and India predicted to continue fueling strong demand in the future.

Faster-than-expected growth in Asia could quickly place significant capacity pressure on the Australian economy. “Although the exchange rate would adjust and monetary policy react, allowing the automatic stabilizers to operate fully would avoid potential overheating,” say the economists in their report.

They also recommend saving revenue windfalls, which would build a buffer against any sharp fall in commodity prices and permit those automatic stabilizers to operate during downturns.

The economists also welcomed the planned introduction of a mineral resource rent tax as “a step in the right direction.” Tax reform could play a key role in allowing Australia to reallocate resources to the mining sector, and to take full advantage of the mining boom. They recommend that the new minerals tax could be broadened to cover other mineral resources beyond iron ore and coal.

Supporting recovery

Australian authorities acknowledge that the boost from mining is likely to test the economy’s capacity. Against the background of the country’s strong recovery, the authorities have already started to withdraw policy stimulus. The central bank has raised the policy rate to 4 ½ percent, most recently in May, and the authorities plan to return Commonwealth government budget to surplus by 2012/13.

“If the recovery remains on track and downside risks...