Scorching fires, thick plumes of smog, and irreversible damage to local ecosystems; this has been the reality of the eastern states of Australia for the past four months. In particular, this recent season has proven to be far more severe than any other in history. Not only did the bushfire season begin earlier and end later, but the overwhelming physical destruction and the sheer amount of people impacted by the fires reached record highs. While these physical impacts are apparent, it may be slightly more ambiguous as to the true extent of the bushfire’s economic impacts. So what are the economic impacts?
The most direct form of damage to the Australian economy is the negative impact on labour productivity. The NSW Rural Fire Service is a firefighting agency entirely comprised of volunteers who hold regular (and more productive) full-time jobs. This implies that any firefighting activity will mean that labour resources will be temporarily redirected from those productive industries to more inefficient firefighting activities. Thus, prolonged and large-scale firefighting efforts means that Australia risks losing production in other, more productive industries.
This reduction in labour productivity is compounded when one considers the amount of people that have lost their lives, become hospitalised, or have been displaced as a result of the bushfires. In fact, Moody’s Economics has estimated that over 30% of the population has been directly impacted by this year’s bushfire season. This directly restricts both the quantity and quality of labour available in the economy and further impacts Australia’s productive capacity.
The catastrophic devastation of farmland means that the productive capacity of Australia’s agricultural industry is at risk in the long term. Currently, the fires have charred at least 8.4m hectares across the whole country compared to the mere 0.45m ha affected by Black Saturday (2009). Given that most Australian consumers strictly prefer fresh fruit and vegetables that are produced domestically, the damage to rural areas and the subsequent reduction in supply of these goods will ultimately result in upward pressures on consumer prices.
This problem may also be extended to the long run. Produce can’t grow on scorched land and this scorched land may take a long time to regrow. Thus, we might observe that the productive capacity of Australia’s farmland will be seriously hampered and these upward pressures on consumer prices may in fact be long term if not permanent.
Insurance companies are some of the worst losers of natural disasters and these recent bushfires have proven to be no exception. These firms have a unique business model in which they diversify away most of the risks specific to individual policy holders by selling insurance products to a wide range of people and businesses. The idea is that some risks will neutralise each other and allow them to minimise losses while maintaining profits. On the other hand, they are extremely susceptible to natural disasters such as bushfires which are risks that cannot be diversified away as they can affect a large range of people simultaneously.
For this bushfire season alone, there were around 8,200 claims lodged on destroyed assets and land which was valued at around $644m according to Insurance Council of Australia data. The sudden influx of claims means that insurance companies will be experiencing lower profitability. In order to recover profit margins, insurance firms will likely have to raise the premiums that they charge on their insurance products which will ultimately be translated into higher costs of living for consumers.
It is evident that bushfires have far reaching impacts on the economy that go beyond simply the physical damage to the environment. Looking forward, it is important for governments to consider these when designing economic policies. The obvious question to then ask is how will these recent bushfires impact government policy design in the future? As the threat of bushfires has continually increased over the past few years, fiscal policy criticism has been brought to the forefront of political discourse. The lacklustre climate change policies, the cutting of funding to Fire & Rescue NSW, and even the poorly timed holiday plans of Scott Morison have all been scrutinised under the public eye.
The ultimate effect of this is that future political campaigns may place higher emphasis on fire service funding in an attempt to garner public appeal and votes. On a positive note, we may potentially see better containment of fires and greater mitigation of the risks discussed above. However, if the money could be allocated to more productive areas of the economy, or if the Australian government wished to recover its budget deficit (as has been promised in recent years), then these bushfires may prove to be an obstacle to achieving the government’s economic objectives.