CoPS/IMPACT Working Paper Number G-295

Title: Distinguishing Between Policy, Drought and International Events in the Context of the Murray Darling Basin Plan

Authors: Glyn Wittwer and Michael D Young


This study starts by examining the background economic circumstances of the 2007 Water Act and the 2012 Murray Darling Basin Plan. During the 1990s, a competitive Australian dollar contributed to an expansion of some sectors in the Murray Darling Basin, notably wine grapes. From the turn of the millennium, two adverse background events brought difficulties for agriculture in the Basin. First, the millennium drought resulted in reduced irrigation water allocations and contributed to diminished dry-land productivity, notably in 2002-03 and from 2006-07 to 2008-09. Second, the Australian dollar appreciated markedly relative to levels of the 1990s in the wake of the mining boom. This diminished returns to agriculture.

In the context of background difficulties, there were mixed responses in Basin communities to the Water Act (McCormick 2007). Some farmers embraced the financial option that arose from proposed buybacks, using proceeds as an opportunity to restructure or retire. Others regarded buybacks as a threat to the viability of Basin communities. Using TERM-H2O, a multi-regional CGE model of Basin regions, previous studies showed that the marginal impacts of buybacks are second-order relative to drought, and can even be positive.

A change in political direction has resulted in a suspension of water buybacks, regarded by economists as the cheapest mechanism to increase environmental flows. The Basin Plan is at present concentrating on infrastructure upgrades. An updated version of TERM-H2O shows that a $4 billion program on upgrades between 2020 and 2024 to procure almost 500 GL of water for the environment would result in a net present value (NPV) welfare loss of $1.1 billion. The investment in upgrades increases jobs in the Basin by around 1000 relative to no investment for each of the five years of upgrades. Thereafter, Basin jobs increase by around 100 relative to no upgrades, based on estimated productivity gains arising from the upgrades.

This study also models the marginal impacts of increased public spending of $4 billion over 10 years on services in the Basin. This is treated as a substitute for infrastructure upgrades. In this scenario, the same volume of water rights, almost 500 GL, is set aside for environmental purposes. Each dollar spent on education, health and community services creates four times as many jobs as spending on infrastructure upgrades. That is, jobs in the Basin rise relative to base by between 1,800 and 2,100 over the decade of additional spending. The NPV of the welfare loss is $0.125 billion.

JEL classification: Q15; C68

Keywords: irrigation reforms; environmental flows, regional economic impacts

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