Estimating the Regional Economic Impacts of the 2017 to 2019 Drought on NSW and the Rest of Australia

Much of New South Wales and southern Queensland suffered from extreme drought conditions from 2017 to 2019. In 2017, rainfall anomalies over 12 months were not extreme, but maximum temperatures across northern New South Wales and southern Queensland were far above normal. There was also a marked deficit in winter rainfall so that there were severe shortfalls in effective rainfall. The drought worsened in 2018 through a combination of marked winter rainfall deficits and continuing temperatures far above average. Regions which in the past have rarely experienced drought, notably the Liverpool Plains in New South Wales, were in throes of extreme drought. Conditions only worsened in 2019, the hottest and driest year recorded in Australia. This study models the marginal impacts of drought on the regional NSW and national economies of Australia using VU-TERM, a multi-regional, dynamic model of the regions of Australia. It does not include losses arises from the catastrophic bushfires which started in Queensland in September 2019 and flared in all states and territories in the following months. From the national perspective, prolonged drought had substantial impacts on national productivity. It was sufficient to force real GDP to more than 1.0% below base in 2018-19 and 2019-20. The marginal contribution of drought to national real wages growth was as much as minus 1%. Modelling results indicate that NSW real GDP fell relative to forecast by 0.7% or $2.6 billion in 2017-18, and more than 1.3% or $5.5 billion in 2018-19 and 2019-20. 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. NSW job losses due to drought were around 0.55% or 17,500 FTE jobs in 2017-18 and more than 1.0% or 34,000 jobs in 2018-19. The state-wide jobs outcome in 2019-20 was slightly better due to real wages falling further relative to base. At the regional level, relatively farm-intensive parts of the state suffer proportionally greater drought-induced losses. All inland regions were affected severely by drought. The worst affected region was New England-North West, in which real GDP in both 2018-19 and 2019- 20 fell almost 15% below forecast, with an accompanying drop in employment of more than 5.0%. Other hard-hit regions include Far West-Orana, in which 2018-19 and 2019-20 real GDP fell 12% and employment fell 4.0% below forecast. The economic losses spread into regions not directly affected by drought. In the composite coastal region spanning Wollongong, Sydney and Newcastle, real GDP fell 0.6% below forecast and employment as much as 0.8% below forecast. Jobs in the coastal region which accounts for 78% of baseline state-wide employment fall by more than 21,000 FTE, with jobs in other regions falling by around 13,000 FTE in 2018-19 relative to base. In this scenario, we assume that there is a full recovery in seasonal conditions in 2020 which impacts on 2020-21 economic outcomes. However, prolonged drought depletes farm capital through two mechanisms. First, reduced farm income depresses investment during drought years. Second, prolonged drought leads to a depletion of herd numbers. This extends beyond additional slaughtering to culling. Consequently, drought depletes the income earning capacity of farms in recovery relative to no drought. At the sectoral level, there are some farm output losses in the recovery phase relative to forecast due to the depleted capital base following drought. The drought diminishes national welfare. Lost productivity depresses income in drought. Even with NSW and national employment rising above forecast in recovery, real GDP remains slightly below base in recovery and does not compensate for drought-induced losses. The net present value of national welfare is $43 billion, equivalent to a loss in annualised terms of $1740 million at a 3% discount rate. The NSW welfare loss is around $685 million annualised, equivalent to permanent annual welfare loss of $88 per NSW resident. A modelled compensation package consists of direct transfers to households in droughtaffected regions. This results in a slight increase in welfare in NSW. This is because compensation stimulates consumption, which in turn stimulates employment slightly, thereby reducing drought-induced job losses relative to no compensation.