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State border closure worth the economic pain

Victorian Premier Daniel Andrews’ decision on Tuesday to send metropolitan Melbourne back into lockdown, in response to surging COVID cases, will deal a further blow to hopes of a recovery in the state.

But like so many questions in economics, assessing these restrictions means looking at both costs and benefits. If you only look at the negative economic impact of tighter restrictions — and there will undoubtedly be many — you only get half the story.

Monday’s decision to shut the NSW-Victoria border is the most dramatic in a series of recent border closures by state governments trying to stop the spread of the coronavirus.

The last time this happened was the 1918-19 Spanish flu pandemic, also following an initial attempt by the federal government to have all states work together.

That border closure, put in place by NSW, was unsuccessful. NSW State Archives and Records reports that closing the border did not stop the Spanish flu gradually spreading throughout the state after it reached Sydney on a ship.

But regardless of how successful this closure is a century later, it’s clear there will be nasty side-effects for some parts of the economy.

NSW accounts for about a third of national economic output, and Victoria makes up just under a quarter. Closing off the movement of people between the states and having Melburnians stay home is undoubtedly a setback to the federal government’s plan to reopen activity, and Treasurer Josh Frydenberg has acknowledged it will probably cost jobs.

The pain from the border closure will be particularly acute for the already struggling tourism and travel industries, at a time when inter-state visitors brought a ray of hope after international tourism had ground to a halt.

Illustration: Simon Letch

Illustration: Simon Letch Credit:

Deloitte Access Economics reports that inter-state tourism is worth $39 billion in annual spending, about a quarter of the domestic tourism economy. “It’s a sobering outcome when the industry was starting to feel some optimism about travel and visitation returning,” says Access partner Adele Labine-Romain, pointing out South Australia and Tasmania’s sectors are particularly dependent on spending by inter-state travellers.

Business travel is another likely casualty, though much of this has already been replaced by Zoom meetings in recent months.

The border closure is also a further blow to the reeling aviation sector, given Sydney to Melbourne is also one of the world’s busiest air routes (or at least it was until the virus struck).

Less tangibly, the confidence of households and businesses may well suffer from the border closure and Melbourne’s lockdown. And such a hit could have a real influence on economic activity, because if consumers all tighten their purse strings at the same time, it makes a bad situation worse for businesses that depend on us spending money.

Even so, the closure of the NSW-Victoria border — and indeed the other state borders closed this year — do not mean all economic links are severed.

Trucks have continued crossing state borders for months, and the NSW government says freight will be given special treatment, as will people in border towns who have a permit. Industry is worried about the complexities of a permit system and the potential for delays, with the Logistics Council pointing out there are 7300 heavy vehicles that cross the NSW-Victoria border every day.

But these disruptions need to be seen against the much bigger economic benefit from containing the virus —which, without a vaccine, can only be achieved by restricting the movement of people.

For all the financial pain of the last few months, Australia’s economy has emerged in better shape from the pandemic than the experts were fearing in March.

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That track record is the result of moves to suppress the spread of the virus, which allowed the earlier-than-expected lifting of restrictions — until now in Victoria.

There is therefore an economic case for trying to protect this position in other states, including NSW, while doing what’s needed to contain the virus in Victoria.

And this is not just some theoretical argument cooked up by economists — there’s already early evidence of how fresh outbreaks can have real financial consequences.

ANZ Bank’s weekly data on customer spending on Tuesday showed Victoria lagging other states, which the bank put down to the recent surge in COVID-19 cases in Melbourne.

Closing the NSW-Victoria border will have real costs, but these should be compared with the economic and human costs we’d face from the virus spreading more widely in our two most populous and economically significant states. In that contest, a border closure looks like the lesser of two evils.

Ross Gittins is on leave.

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