The regional economic impacts of the 2017 to 2018 drought on NSW

The economy of New South Wales has suffered from a drought which started in the northern part of the state in 2017 and has spread over much of the state in 2018. This study uses a dynamic, multi-regional computable general equilibrium model of the Australian economy, VU-TERM, to estimate the impacts on regions within New South Wales. Modelling results indicate that state-wide real GDP falls relative to forecast by 0.4% or $2.2 billion in 2017-18 and prospectively by 0.9% or $5.3 billion in 2018-19. These impacts reflect a severe diminution of farm output, given that agriculture accounts for around 1.6% and downstream processing for around 3.5% of NSW’s income. State-wide modelled job arises due to drought are around 0.24% or 7,700 FTE jobs in 2017-18 and 0.54% or 17,300 jobs in 2018-19. At the regional level, relatively farm-intensive parts of the state suffer proportionally greater drought-induced losses. The worst affected region is New England–North West, in which real GDP in 2018-19 falls more than 12% below forecast, with an accompanying drop in employment of 3.9%. The drought diminishes national welfare. Lost productivity depresses income in drought. Depleted capital in recovery implies that even with NSW and national employment rising above forecast in recovery, real GDP rises only slightly relative to forecast in recovery and does not compensate for drought-induced losses. The net present value of national welfare losses in annualised terms is $380 million. Two compensation packages are also modelled. The model used in this study does not include water accounts. Although cutbacks in water allocations were a consequence of the 2018-2019 drought, dry-land productivity losses due to rainfall deficiencies dominate overall farm losses. A theoretical modification for this study was to allow input substitution between land and fodder inputs in livestock production.