Western Australia - Bludging Off the Eastern States?

Many Western Australians reckon that the eastern states are holding back their growth, prosperity and well-being. The WA Mines Minister Norman Moore went so far as to suggest that the State should sucede from the rest of Australia! How ridiculous and ill-conceived and poorly thought out. It could well hurt WA to go alone.

It could be argued that WA is retarding the eastern states as the mining boom continues.

The reasons are pretty simple.

If Western Australia was its own country, it would have its own currency and own interest rates. "Other Australia" would also have its own currency and interest rates. While it is hard to be sure how the WA dollar (WAD) and Other Australia dollar (OAD) would trade, an educated guess would be that the WAD would trade at say 1.10 against the USD, with OAD at 0.90. In other words, WA would have its international competitiveness crimped by 10%, while Other Australia would be boosted by 10% by such a currency move.

It would be a similar situation with monetary policy. The current cash rate for all of Australia is currently 4.5% and that is the benchmark whether you are in booming WA or in subdued Tasmania. A rough guess might have the Central Bank of WA running the cash rate around 1% higher at 5.5% as it tackles the boom, with the Central Bank of Other Australia with a cash rate of say 3.5% due to different (lower) inflation risks. Such would be the dynamics of each new "country's" terms of trade and inflation pressures that a 2% gap in interest rates would be about right.

These two issues alone should show how WA is being helped by having a less robust eastern states keeping inflation lower, supplying cheaper labour and keeping the exchange rate and interest rates lower.

There is also the issue of the fiscal side. If WA was a country, it would have to running its own border protection (almost all boats land in WA) and defence, which at the moment is being massively subsidised by eastern States tax payers. I don't have the means to work out how the relative fiscal figures would pan out, but due to geography, size and population distribution, WA tax payers would have to pay a large amount to run its own coast guard and defence and this is money the eastern States taxpayers would be saved.

The bottom line is that we have a good federation that works well. There are fiscal and economic swings and round-abouts as each State and Territory has a different economic structure and different fiscal requirements. WA is strong because of the massive mining boom and some money is flowing to the Eastern States under Grants Commission rules. But there are benefits flowing back to WA from having a currency (Australian dollar) and interest rates that are certainly lower due to the less robust economic conditions in the eastern States.