The boom will end, plan for it: economists

25 May 2012, 1:07 pm   -   Source: AAP

Australia needs to prepare for the mining boom's end by considering how to make its economy more diverse and stockpile wealth for lean times.

It is an understatement to say that the past decade has been a good time to be in the business of exporting resources.

But the timely question is: how will Australia fare once it no longer has a booming mining sector to fall back on?

Asian demand for coal, iron ore and other commodities has made Australia's economy the envy of the developed world.

Along the way it has propelled many people to wealth, including Gina Rinehart who, with an estimated fortune of more than $29 billion was this week named the world's richest woman by magazine BRW.

Investors are confident the good times will continue.

A report released by the Bureau of Resources and Energy Economics on Thursday showed there were more than $260 billion worth of projects in the pipeline at the end of April.

But booms don't last forever.

The World Bank on Wednesday warned commodity prices are likely to fall during the next decade or so as China undergoes a metamorphosis from export-driven to consumer-driven economy.

And prices could fall much more quickly than that if Europe's debt crisis takes a larger than expected toll on China.

According to Steen Jakobsen, global chief economist of Danish-based Saxo Bank, it is time for Australia to diversify the economy.

"Australia is coming from a great starting point but if the reforms don't come it could be a basket case," he told AAP.

"Everybody is aligned to the mining industry and I think that is wrong."

Being European, Mr Jakobsen naturally reaches for a football analogy to explain Australia's predicament.

"Australia is like Arsenal, you're in the mid-table of England's Premier League, the risk, like Arsenal is that you are not investing enough in new players."

"I like your team, I like the way you play but you have gotten away with under-investing for a few years. This is the season that you reinvest otherwise next season or the season after you may face relegation."

Bank of America Merrill Lynch Australia chief economist Saul Eslake disagrees.

It's inevitable the boom will end, he says, but that doesn't mean Australia should become less reliant on mining, since the resources industry provides it with a competitive edge.

"Say you're a film star or a writer; that means you will have a highly volatile income," Mr Eslake said.

"The wrong way to think about that is: `I think I'll be a motor mechanic instead.

"The better way to think about it is to say: "I'm in a volatile business, there are going to be some years when I make a lot of money and others when I won't, so what do I do?"

Mr Eslake said the was not to boost industries like manufacturing, which tend to struggle without government assistance, and instead stockpile wealth for the lean times ahead.

The Gillard government expects the federal budget to return to surplus in the next financial year and, if the boom holds up, the surpluses should get bigger over the coming decade.

Mr Eslake believes if that happens the government should hold on to the windfall, perhaps by establishing a sovereign wealth fund, rather than passing it back, like the Howard government did, to taxpayers.

"What we should be doing is running bigger budget surpluses when commodity prices are high so that when they are not we can afford to run deficits without harming out public finances," he said.

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