Year

2015

Degree Name

Doctor of Philosophy

Department

School of Accounting, Economics and Finance

Abstract

Natural resource abundance has played a prominent role in economic growth performance in many resource producing economies. Amongst them, the Australian economy has also experienced major impacts from non-renewable natural resource production and exporting since the mid-19th century. The conventional view in the literature characterises natural resources as a curse due to unwanted consequences upon non-resource sectors such as the manufacturing sector. However, some empirical evidence suggests that government could potentially play a dominant role to avoid the unwanted resource curse and convert it into a blessing, leading to economic prosperity for the country.

The aim of this study is to investigate the relationship between a resource price boom and the performance of major macroeconomic variables. More importantly the role of related fiscal policies and their consequences in response to a resource price hike are examined. Collecting the resource rent is considered to be one of the main tasks of the government in resource producing countries, especially when the resource price is increasing, therefore, as the first stage, the outcomes of a higher natural resource tax on major macroeconomic variables is examined. This will cover the main issues following a resource price boom on the revenue side. Then the outcomes of the ways the collected funds are spent by the government is of particular interest for this study as the next stage. The main goal in this stage is to establish whether the collected funds should be spend on investment or consumption expenditures in order to get a greater economic benefit, which leads to important empirical policy advice.

To reach to the above goals, the first step is to construct the required macroeconomic model. In this regard the original model of Cox and Harvie (2010) is further developed in a variety of aspects. Incorporating an endogenous resource producing sector into this model is one of the major developments to the model and this is the first step to fill an existing gap in the literature as the resource sector is generally viewed as an exogenous sector. The need to include this sector’s characteristics in the model has resulted in this study using a hybrid macroeconomic modelling methodology. Therefore, some features of micro-founded macroeconomic models such as Dynamic Stochastic General Equilibrium (DSGE) models are applied from both a modelling and econometrics perspective. The model under study characterises the Australian economy using data for major macroeconomic variables for the period 1988:Q3–2011:Q3. Bayesian estimation techniques and a number of simulations are applied in order to obtain the required empirical results.

The overall outcome of the empirical study suggests that in order to gain economic benefits from a resource price boom, it is more appropriate for government to apply a higher natural resource tax. The results also show that both resource and nonresource sectors benefit from this taxation policy over the resource boom period. The applied scenarios for government expenditure also provide interesting results; during a resource boom it is better for the economy if the government allocates more of the collected funds from the resource sector to infrastructure investments and boosting human capital, such as improving health services or education levels, rather than allocating those funds to consumption expenditure. As the investment option would also transfer the benefits of the resource sector to future generations as well, this is consistent with the literature which recommends this method to achieve inter-generational equity of resource usage in line with suggestions in Hartwick (1977) and Hannesson (2001). The results also reveal that if the government spends more on consumption expenditure than investment then, from an economic growth perspective, the overall impact of the resource boom by applying a higher resource tax during a resource price boom actually has a slight negative impact compared to the positive outcome in the scenario where the government allocates the funds for investment. This highlights the importance of creating a Sovereign Wealth Fund (SWF) for the Australian economy in order to ensure the spending of the collected revenue from the resource sector into the most appropriate investment options, as experienced by other advanced economies such as Norway.

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Unless otherwise indicated, the views expressed in this thesis are those of the author and do not necessarily represent the views of the University of Wollongong.