The economic impacts of the 2019-20 bushfires on Victoria

PUBLISHED: June 2021

Written by Glyn Wittwer^[1], Kuo Li and Shenglang Yang.^[2]

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Contents

Overview
1. Methodology
2. Results and discussion
3. Conclusion
References

Abstract Understanding the economic impacts of the 2019-20 bushfires on the State can help inform future policy making. This paper has been jointly produced by the Department of Treasury and Finance and Centre of Policy Studies (CoPS) and uses the Dynamic VU-TERM computable general equilibrium (CGE) model to quantify the economy-wide impacts of the 2019-20 bushfires in Victoria. The direct impacts of the bushfires in terms of capital destruction and labour productivity losses, along with the indirect impacts to international tourism, which are assumed to be sizeable and prolonged, result in a 0.1 per cent fall in Victoria’s real gross state product (GSP) in 2019-20, with output remaining below baseline levels for more than five years. The overall welfare losses to Victoria are estimated to be $2.1 billion in net present value terms (in real 2017-18 dollars), with around 70 per cent of the total economic impacts attributed to the assumed effects of the bushfires in supressing international tourism to Victoria over the forward years. Accommodation and food services, transportation and construction sectors incur substantial losses due to their supply chain linkages with international tourism. It is important to note that this analysis does not account for the Government’s responses to the bushfires. Broader costs relating to the environment, health and wellbeing are also not considered in this modelling. While the economic impacts of the bushfires have now been overwhelmed by the impacts of the coronavirus (COVID-19) pandemic, this study shows the impacts of bushfires alone. The pandemic would worsen outcomes in regions directly affected by bushfires by slowing building and property restoration and hindering a return to business-as-usual.

Overview

The Australian bushfires in 2019-20 left a devastating impact on communities, through loss of lives, destruction to homes, farmland, infrastructure, crops and conservation land and the corresponding impact on livelihoods.

In Victoria, more than 1.3 million hectares of land were burned with close to 400 homes destroyed and five fatalities. Most of the fire-related direct impact (i.e. asset losses, smoke damage and production disruption) occurred in North East Victoria (comprising Wangaratta and Wodonga) and East Gippsland. As at May 2020, the Insurance Council of Australia estimated the total insurance loss attributed to the bushfires nationwide to be $2.3 billion with over 38,000 claims. Around 8 per cent of the total insurance loss was attributed to Victoria (Insurance Council of Australia, 2020). Prolific media coverage of the bushfires also affected international tourism (Schweinsberg et al., 2020).

The coronavirus (COVID-19) pandemic following the bushfires further reduced economic activity and overshadowed the economic impacts from the bushfires. However, understanding the economic impacts and the inter-sectoral flow-on effects of the 2019-20 Australian bushfires remains important in 2021. Australia is prone to natural hazards, especially bushfires. The frequency and severity of fire weather in southern and eastern Australia has increased since 1950 (Royal Commission into National Natural Disaster Arrangements, 2020). Just more than a decade ago, the 2008-09 Victorian bushfires destroyed more than 3,500 buildings and more than 450,000 ha of land (2009 Victorian Bushfires Royal Commission, 2010). Understanding the economic impacts of bushfires and the inter-sectoral flow-on effects can inform policy responses for future natural hazards.

This study uses a dynamic version of The Enormous Regional Model (TERM) CGE model developed by the Centre of Policy Studies at Victoria University to examine the economic impacts of the 2019-20 bushfires on Victoria. The original TERM model provides a multi-regional representation of Australia that is useful for examining the regional impacts of shocks that are region specific (see Horridge, 2011). The dynamic version of this model, called the Dynamic VU TERM model, allows for the effects of ascribed impacts to be traced across time periods.

This study focuses on impacts the 2019-20 bushfires had on economic conditions in the regions that were most adversely affected by the fires (both directly and indirectly), as well as the implications for Victoria as a whole. We also analyse the impact of the bushfires on different industries. We consider the direct bushfire impacts via destruction of output, damage to capital along with the adverse effects of hazardous smoke on labour productivity. We also account for the indirect impact on international tourism through the damage to Australia and Victoria’s attractiveness as a tourist destination. The assumptions in relation to the length and severity of weakness in international tourism is a key driver of the modelled economic impacts. We do not consider the broad costs arising from destruction of native forests and diminution of fauna and flora. In addition, losses in human life along with the broader costs of the excess health burden such as those associated with increased hospital admissions are not quantified in the model.

By simulating the model with a set of hypothetical shocks, we find that the impacts of the bushfires result in a 0.1 per cent fall in Victoria’s real GSP in 2019-20 and that it takes more than five years to recover to its pre‑bushfire baseline levels. The overall welfare losses to Victoria are estimated to be $2.1 billion in net present value terms (at a discount rate of 2.5 per cent) over an 11-year simulation period covering 2019-20 to 2029-30. The study finds that the direct impacts of bushfires were vastly outweighed by the indirect impacts of assumed weaker international tourism demand, which had more widespread effects in Victoria and accounted for around 70 per cent of the net welfare losses. We find that the accommodation and food services and transport sectors suffer the largest losses due to their exposure to international tourism and these losses persist until the end of the simulation period. Additionally, the construction industry also suffers substantial losses due to its connection with investment, which declines in some regions due to depressed tourism demand.

Despite the lack of studies focusing specifically on the impacts to the state of Victoria, other studies have examined the overall impacts on Australia. The Reserve Bank of Australia (2020) estimated that the direct effects of the bushfires would reduce national gross domestic product (GDP) growth across the December 2019 and March 2020 quarters by around 0.2 percentage points, with some recovery in the June quarter and beyond. Similarly, Westpac (2020) estimated that the bushfires would result in a 0.2 to 0.5 per cent reduction in annual GDP, and placed the total cost in terms of insured and uninsured losses at around $5 billion nationally.

This study, however, does not account for the financial cost of government responses to mitigate future bushfires and to support disaster recovery. Government responded at both the national and state levels. At the national level, the Commonwealth Government has committed more than $2 billion to various bushfire recovery programs (see National Bushfire Recovery Agency, 2020). At the Victorian state level, the Victorian Government has invested $250 million towards affected communities including the establishment of Bushfire Recovery Victoria (BRV), which is currently administering the clean‑up program in Victoria (Parliament of Victoria, 2020). There are also a range of financial support and relief programs targeting various affected individuals, families and businesses (see State Government of Victoria, 2020). All else equal, such schemes would be expected to expedite economic recovery by boosting the speed of capital recovery and cushioning the damaging impacts to employment in various affected regions and industries.

While the economic impacts of the bushfires have now been overwhelmed by the impacts of the COVID-19 pandemic, this study shows the impacts of bushfires alone. The pandemic would worsen outcomes in regions directly affected by bushfires by slowing building and property restoration and hindering a return to business-as-usual.

This study demonstrates an approach to understand how the impacts of localised bushfires flow through the economy and quantifies the impacts of bushfires on Victoria. This fills the gap in the existing 2019-20 bushfires analyses.

1. Methodology

This study uses the Dynamic VU-TERM multi-regional CGE model to measure the economic impacts of the 2019-20 bushfires on Victoria. 

CGE models are large numerical models which combine economic theory with real economic data to computationally determine the impacts of policies or shocks to an economy. They provide a valuable modelling framework for conducting ‘whole of economy’ analysis due to their highly disaggregated conceptual architecture, enabling the inter-relationships of a wide range of economic agents and their interactions to be captured. Their whole of economy construct enables both the direct and indirect (secondary) effects of policies, events or projects to be considered. As such, they can give holistic insights into the estimated economic costs and benefits for an economy and its sectors. CGE models have been used to inform a wide range of policy debates at the state, national and global level.

The Dynamic VU-TERM model is an economy-wide model developed by the Centre of Policy Studies that can account for and represent various small regions within the economy (see Horridge, 2011). The model is regionally disaggregated to include the two Victorian regions impacted by the bushfires, namely North East Victoria (Wangaratta and Wodonga SA3 regions) and East Gippsland. 

For the purposes of this study, the model database contains 26 sectors, including horticulture, wine grapes, livestock, broadacre crops and various downstream product industries for the agriculture sector.^[3] It also includes major tourism-related sectors, such as hotel and cafes, holidays by domestic residents and tourism exports.

Modelling strategy and input data

The Dynamic VU-TERM model traces the effects of ascribed shocks across time periods. The 11-year time horizon including the impact year (2019-20 to 2029-30) that we use in this study allows the short, medium and long-run impacts of the bushfires to be observed. A ‘business as usual’ forecast baseline is established over this horizon which allows the modelling results to be presented as deviations relative to this baseline. There are several broad types of economic costs arising from bushfires, including:

• destruction of capital, including houses, outbuildings, livestock, vineyards, other plantations, fencing, cars, powerlines, easements and telecommunications towers;
• destruction of current crops including the impact of smoke taint (mainly output loss in the Wine Grape and Wine industries);
• loss of labour productivity due to smoke;
• reduction in visitors to regions; and
• increased insurance premiums as a result of the insurance payouts.

All costs in this study are measured in 2017-18 monetary terms.

We estimate the direct and indirect impacts of the bushfires via shocks to capital, productivity, insurance premiums and tourism. These shocks are calibrated based on a range of sources including news media and government reports.

The direct capital loss nationwide is estimated to be a significant $3.2 billion.^[4] In Victoria, the affected regions were North East Victoria ($268 million) and East Victoria including Gippsland ($370 million). Labour productivity losses are associated with hazardous smoke and poor air quality, which can exacerbate asthma and other respiratory conditions. Although the smoke was prolonged and hazardous in bushfire regions, the movement of smoke to major urban areas in Victoria was more limited and short-lived. In contrast, New South Wales suffered more than 35 days of hazardous smoke levels in 2019 (NSW Department of Planning, Industry and Environment, 2020). Figure 1 presents the estimated losses to capital and labour productivity and the increase in insurance payouts by region.^[5]

Figure 1: Estimated direct losses in capital and labour productivity and insurance payout, Victoria, 2019-20

The destruction to capital in North East Victoria was primarily experienced in the Wine Grape and Wine industries^[6]. These industries lost more than 25 per cent of output in 2019-20 due to the smoke damage to vineyards. Disruptions caused by the smoke also leads to loss in total factor productivity in these two industries (Figure 2).

The indirect effect of the bushfires on tourism is less certain and assumption driven. It is assumed that domestic tourism recovers quickly, with public campaigns playing a role in restoring regional demand. In addition, due to domestic visitors having better knowledge and access to information on local conditions, the negative perception-based impacts on domestic tourism can be quickly mitigated.^[7] Based on this reasoning, no shock is imposed to domestic tourism for this study.

On the other hand, it is assumed that there is a persistent impact on international visitors due to perceived risks of bushfires during their stay in Australia and other reputational damages. The magnitude of the negative impact is assumed to be a 20 per cent decline in tourism exports during the second half of 2019-20.^[8] This decline in tourism exports is widespread across multiple regions and impacts not just those in the directly affected areas. A notable reduction in international travel underpins this profile, with international visitors assumed to form long-lasting impressions of the risks of travelling to Australia. Tourism exports are assumed to improve slightly during the following two years, improving to a 10 per cent decline from the baseline in 2020-21 and 2021-22. It is assumed that by 2022-23, tourism exports recover back to baseline levels.^[9]

Figure 2: Loss of output and productivity in Wine Grape and Wine industries (North East Victoria)

This study does not consider the entire range of health and wellbeing effects on affected individuals and communities. For example, aside from the adverse health impacts of smoke inhalation on various respiratory and cardiovascular conditions, the bushfires are also likely to escalate the incidence of post‑traumatic stress disorder (PTSD) among professional and voluntary firefighters. As a result, this study likely underestimates the impacts associated with time off work and labour productivity losses. Also, the broader costs associated with the excess health burden such as increased hospital admissions are not measured. Moreover, the loss of human life both directly in the bushfires along with smoke-related deaths such as those estimated by Arriagada et al. (2020) are not quantified. In addition, the costs arising from destruction of native forests and diminution of fauna and flora are also not considered.

Finally, this study has excluded the impact of government policies and community initiatives that would mitigate the economic impacts of the bushfires in this analysis. Specifically, the various financial support programs provided to small businesses and primary industries, along with taxation relief measures for businesses, families and individuals in affected regions (see State Government of Victoria, 2020) can be expected to expedite economic recovery.

2. Results and discussion

This section discusses the modelled economic impacts of the bushfires on Victoria, selected regions and industries. It considers the regions directly impacted by the bushfires (i.e. North East Victoria and East Gippsland) as well as the regions indirectly affected by ongoing reductions in international tourism (i.e. Melbourne, Yarra Ranges, Mornington Peninsula and Great Ocean Road regions of Warrnambool-Otway Ranges-Surf Coast). The estimated impacts on all economic indicators are reported as percentage deviations relative to baseline business as usual levels.

2.1 Statewide impacts

During the 2019-20 event year (year 0), we estimate that Victoria suffered a 0.1 per cent loss in GSP brought about by the impacts of capital destruction and employment and productivity losses. Figure 3 shows the impact and recovery path for GSP, employment, real wages and capital.

Figure 3: Real GSP and factor inputs, Victoria (per cent deviations from business-as-usual base)

It takes more than five years for real GSP to return to near pre-bushfire baseline levels. Although the direct bushfire impacts are concentrated in North East Victoria and East Gippsland, their contribution to statewide GSP losses are small as these regions only account for a small proportion (around 2.2 per cent) of Victoria’s GSP. This vast majority of losses in state GSP are attributed to the disruption to international tourism in non-bushfire areas. Being an important economic driver for the State, international tourism contributed around $4.7 billion to Victoria’s gross value add in 2018-19 (Business Victoria, 2020).

The losses in capital in North East Victoria and East Gippsland in 2019-20 is estimated to be 0.03 per cent of the State’s total capital stock. The destruction of capital coupled with the decrease in international tourism demand weaken the labour market in Victoria, with employment falling by 0.04 per cent during 2019-20. The negative impacts to international tourism are expected to persist and do not recover fully until 2023-24. This leads to temporary decrease in investment across Victoria and lower capital stock as a result. Diminished capital stock, coupled with increased insurance premiums for the two fire‑affected regions, result in persistently lower real wages and consumption throughout the simulation period. Employment levels fall in the event year and employment falls are most pronounced in the fire-affected regions of North East Victoria and East Gippsland due to the direct effects of capital destruction and productivity losses. By the end of the simulation period in year 10, employment levels return to base levels in all regions.

Real GSP persists below pre-bushfire baseline levels throughout the simulation period due to the diminished capital stock. Figure 4 summarises the impact on real gross regional product (GRP) for regions throughout the simulation period. The bar chart shows each region’s contribution to the total monetary impact (measured in millions of dollars) during each year, and the line graphs show each region’s percentage deviation from their baseline levels. The chart shows that most of the total monetary impact is attributed to Melbourne due to its substantial base level of GRP. However, it is East Gippsland and North East Victoria that sustain the greatest percentage deviations from their base levels. Around 30 per cent of real GSP losses in the event year can be attributed to the two fire-affected regions, and around 70 per cent of losses can be attributed to other regions.

Figure 4: Summary impact to real GRP ($m) and percentage deviation from baseline by region

The decline in international tourism demand has a damaging impact towards investment in 2019-20. As shown in Figure 5, Victoria’s real investment is 0.2 per cent lower than the base during 2019-20 as a result of the impact of the bushfires, largely driven by a reduction in international tourism. As part of rebuilding efforts, accelerated investment takes place the following year in 2020-21 in the fire-affected regions of North East Victoria and East Gippsland, and propels real investment levels 0.07 per cent above base. Consequently, there is an upturn in capital stock in 2021-22 (see Figure 3). However, as the temporary surge in investment for rebuild wears off after 2020-21, real investment levels drop back below base in 2021-22 before following a gradual recovery path.

Figure 5: Real Investment and Consumption, Victoria (per cent deviations from business-as-usual base)

The net welfare losses for Victoria over the entire simulation period between 2019-20 to 2029-30 is estimated to be $2.1 billion in net present value (NPV) terms, at a 2.5 per cent discount rate. This comprises the following breakdown:

• $663 million of destroyed capital costs offset by $167 million in insurance payouts;
• $183 million of labour productivity losses;
• $16 million of total factor productivity losses; and
• $1.4 billion in international tourism losses.

The decrease in international tourism is the major contributor to the output loss in Victoria, representing around 70 per cent of total losses. An explanation on the calculation of welfare loss is given in Appendix D. This calculation accounts for the reduction in real net foreign liabilities in the final year of the simulation, softening welfare losses. Such a reduction arises from the trade surplus due to the rebound in tourism exports along with the reduction in real wages, making exports cheaper than before.

2.2 Regional impacts

Regions directly affected by bushfires

The direct impacts of the bushfires were concentrated in North East Victoria (comprising Wangaratta and Wodonga SA3 regions) and East Gippsland. As of July 2019, these fire-affected regions had an estimated population of around 69,000 for North East Victoria and 47,000 for East Gippsland.^[10] Together, these two regions account for around 1.8 per cent of Victoria’s total population and 2.2 per cent of Victoria’s GSP.

The panels in Figure 6 depict the impact of bushfires on output, measured by real GRP and input factors (i.e. capital and employment) in North East Victoria and East Gippsland. The figures show the immediate and significant reduction in capital and output in these regions, with losses in East Gippsland proportionately greater than in North East Victoria due to being more heavily hit by the bushfires. The insurance payout and the rebuilding process ensures a considerable recovery in capital level in 2021‑22.

With capital in the form of infrastructure, machinery and equipment no longer available for production, demand for labour decreases resulting in a reduction in employment relative to baseline levels. Additionally, labour productivity falls as a result of the adverse effects of the hazardous smoke. As a result, we observe sharp falls in real GRP in 2019-20.

Figure 6: Real GRP and factor inputs, North East Victoria and East Gippsland (per cent deviations from business-as-usual base)

There is accelerated investment in these regions in 2020-21 to restore capital destroyed by bushfires in the previous year (Figure 7). Real investment is projected to climb by 4.5 per cent above base in North East Victoria and by 22 per cent in East Gippsland, resulting in a recovery in capital stock in 2021-22 as seen in Figure 6. However, there is a permanent increase in insurance premiums in these two regions, leading to higher production costs. Consequently, capital remains around 0.3 per cent below base in North East Victoria and around 1 per cent below base in East Gippsland in the final year of the simulation period. It is worth noting that this spike in real investment does not include the various government bushfire recovery programs, which would further expedite the recovery process.

Capital destruction in fire-affected regions and the resulting declines in employment have flow-through effects for labour market dynamics in these regions. Workers respond to reduced employment opportunities in these regions by adjusting their labour supply, as shown in Figure 8. While real wages adjust lower in this environment, the model assumes that real wages are sticky and the adjustment is therefore sluggish. The rapid recovery in employment the following year in 2020-21 is driven by the restoration of destroyed capital brought by real investment. This recovery eventually leads to a strengthening of real wages from 2023-24. Although employment returns to baseline, both the diminished levels of capital along with the permanent increase in insurance premiums pushes down real wages and ensures that they persist below base levels throughout the simulation period. The reduction in employment and real wages triggers a modest decline in consumption levels, falling by 0.4 per cent and 2.5 per cent in North East Victoria and East Gippsland respectively during 2019-20 (in Figure 7).

Figure 7: Real Investment and Consumption, North East Victoria and East Gippsland (per cent deviations from business-as-usual base)

Figure 8: Labour market, North East Victoria and East Gippsland (per cent deviations from business-as-usual base)

Regions not directly affected by the bushfires

The bushfires have a more widespread impact on Victorian regions via the effects on international tourism. While the local government areas of Melbourne, Yarra Ranges, Mornington Peninsula as well as the Greater Ocean Road regions of Warrnambool-Otway Ranges-Surf Coast were not directly affected by bushfires, they are indirectly affected by losses in international tourism.  

To illustrate these impacts, Figure 9 below depicts the dynamic profile of GRP and factor inputs for Melbourne in response to the bushfires. As shown, no capital losses are incurred during the event year, hence, capital remains at base levels during 2019-20. However, the downturn in international tourism weakens labour markets, pushing down employment close to 0.05 per cent below base levels. This causes the fall in real GRP, declining 0.08 per cent below base levels. The ongoing impacts to international tourism persist and do not recover fully until 2023-24 when employment returns to base levels.

Figure 9: Real GRP and factor inputs, Melbourne (per cent deviations from business-as-usual base)

As shown in Figure 10, the downturn in tourism pushes down investment activity in Melbourne relative to its base levels in 2019-20. This contrasts with the directly affected regions (Figure 7 above) where investment is supported by recovery of capital stock destroyed by bushfires. The reduction in investment means that the annual erosion in capital stock arising from depreciation is not sufficiently restored by new capital. As a result, capital falls below base levels in 2020-21. In addition, real consumption falls due to diminished employment and real wages and persists below base levels due to lower capital levels.

Figure 10: Real Investment and Consumption, Melbourne (per cent deviations from business-as-usual base)

The labour market adjustment profile for Melbourne is given in Figure 11. The adjustment in real wages lags employment due to the assumption of sticky wages. A marked recovery in the tourism industry is assumed for the following year in 2020-21, resulting in a bounce‑back in employment. Although employment climbs back to base, diminished capital relative to base pushes down real wages relative to base and ensures that they persist at these levels throughout the simulation period. The persistence of lower wages also pushes down real consumption below base levels throughout the simulation period (Figure 10).

Figure 11: Labour market, Melbourne (per cent deviations from business-as-usual base)

A similar story is observed for the economies in other tourism regions of the Yarra Ranges, Mornington Peninsula and Warrnambool‑Otway Ranges-Surf Coast. Their simulation results along with those for the rest of Victoria are presented in Appendices A to C.

2.3 Sectoral and industry impacts

This section summarises the modelling results for sectors and industries. Table 1 presents the output changes in the relevant state sectors and industries, measured in millions of dollars in deviation from base.

As observed, many directly-affected industries in the agriculture and manufacturing sectors experience losses in output during 2019-20 and for the two or three subsequent years, for instance agriculture, forestry and support services, meat and dairy manufacturing, and wine manufacturing. This can be attributed to the destruction in industry production and capital, along with the negative impacts to industry employment. As discussed earlier, these direct impacts are mostly attributed to the fire-affected regions of North East Victoria and East Gippsland.

On the other hand, industries indirectly affected by the downturn in international tourism suffer more than those industries directly affected. Notably, the accommodation and food services and transport sectors suffer the largest losses due to their exposure to international tourism and these losses persist throughout the simulation period. The construction industry also suffers substantial losses due to its connection with investment, which falls for some regions due to depressed tourism demand. Unaffected industries such as education and other manufacturing experience an increase in real wages and higher employment.

Table 1: Changes to State industry and sector outputs ($m deviation from base)

	2019-20	2020-21	2021-22	2022-23	2023-24	2024-25	2025-26	2026-27	2027-28	2028-29	2029-30
Horticulture	5	11	7	6	6	5	5	4	4	4	3
Wine grape growing	1	0	0	0	0	0	0	0	0	0	0
Livestock	-3	7	5	5	5	5	5	5	5	4	4
Broadacre cropping	0	1	1	1	1	1	1	1	1	1	1
Agriculture, forestry and fishing support services	-10	-8	-1	-1	-1	-1	-1	-1	-1	-1	-1
Mining	0	2	3	3	3	2	2	2	2	1	1
Meat and dairy manufacturing	-8	-9	-3	-3	-2	-2	-1	-1	-1	-1	-1
Wine manufacturing	-7	0	1	1	1	2	2	2	3	3	3
Other food and drink manufacturing	-9	-10	-5	-5	-4	-3	-3	-2	-2	-2	-2
Textile, clothing and footwear manufacturing	1	3	5	5	4	3	2	2	1	1	1
Wood and paper product manufacturing	0	2	3	3	3	2	1	1	1	1	1
Other manufacturing	5	24	27	25	21	16	10	9	8	7	6
Utilities	-3	-1	-1	-1	-1	0	0	0	0	0	0
Construction	-36	8	-24	-18	-12	-6	0	1	1	1	2
Trade	-38	-12	-8	-4	-2	0	1	1	1	1	1
Accommodation and food services	-82	-88	-72	-60	-47	-32	-15	-14	-13	-13	-12
Transport	-57	-52	-41	-36	-29	-21	-13	-11	-9	-8	-7
Other services	-53	4	-6	1	4	6	5	6	7	9	10
Owner dwelling	-21	-21	-19	-22	-25	-27	-28	-28	-28	-28	-27
Public administration and safety	6	-6	-10	-10	-9	-8	-7	-7	-6	-6	-6
Education and training	7	25	34	29	22	15	8	7	6	6	5
Health	-14	-10	-12	-10	-9	-8	-6	-6	-6	-5	-5
Child Care	-9	-8	-9	-8	-7	-6	-4	-4	-4	-4	-3

Figure 12 shows the changes in real industry output for tourism related industries, namely hospitality (hotels and cafes), transport and other services, and compares them with the net changes for all non‑tourism industries (measured in millions of dollars). The net losses to industry in 2019-20 totalled $323 million.

Figure 12: Changes in output for tourism-related industries versus other industries ($m deviations)

3. Conclusion

This study utilises the Dynamic VU-TERM CGE model to estimate the economic impacts of the 2019-20 Australian bushfires on Victoria, absent any government responses.

This study considers both the direct bushfire impacts of capital destruction and labour productivity losses, as well as the negative impacts on international tourism.

Modelling results were presented for (i) individual regions, including the fire-affected regions of North East Victoria and East Gippsland, as well as impacted tourism regions, (ii) sectors and industries and (iii) the entire State.

Overall, the economic losses to Victoria are estimated to be $2.1 billion in net present value terms (at a discount rate of 2.5 per cent) over a 11-year simulation period covering 2019-20 to 2029-30. The study found that the direct impacts of bushfires were outweighed by the indirect impacts of assumed weaker international tourism demand, which had more widespread effects in Victoria.

Around 30 per cent of real GSP losses during the event year in 2019-20 can be attributed to the fire-affected regions of North East Victoria and East Gippsland, while the remaining 70 per cent of losses can be attributed by losses in other tourism dependent regions. Long-term negative impacts are observed for capital stock, real wages and real consumption in both the fire-affected regions as well as tourism dependent regions, with these indicators persisting below base levels throughout the simulation period.

The industries most affected include accommodation and food services (-$450 million over 10 years) and transportation (-$283 million over 10 years), due to their exposure to international tourism. Additionally, the construction industry also suffers considerable losses (-$84 million over 10 years) due to its connection with investment, which declines in some regions due to depressed tourism demand.

This study has excluded the impact of government policies and initiatives that would mitigate the economic impacts of the bushfires in this analysis. Specifically, the various financial support programs provided to small businesses and primary industries, along with taxation relief measures for businesses, families and individuals in affected regions (see State Government of Victoria, 2020) can be expected to expedite economic recovery. In addition, the loss of flora and fauna and the loss of human life is not quantified in this study.

References

Arriagada, N. B., Palmer, A. J., Bowman, D. M., Morgan, G. G., Jalaludin, B. B., & Johnston, F. H. (2020). Unprecedented smoke-related health burden associated with the 2019–20 bushfires in eastern Australia. The Medical Journal of Australia, 213(6), 282-283.

Business Victoria. (2020). Economic Contribution of Tourism to Victoria 2018-19. Retrieved 7 September 2020, from the Business Victoria website. 

Carruthers, F. (2020, January 17). Tourism loses $4.5b to bushfires as overseas visitors cancel. Australian Financial Review. Retrieved 9 February 2021, from the Australian Financial Review website.

Horridge, M. (2011). The TERM model and its database. Centre of Policy Studies working paper.

Insurance Council of Australia. (2020). Bushfire preparation. Retrieved 30 June 2020, from the Insurance Council website. 

Irvine, J. (2019, December 12). The economic cost of bushfires on Sydney revealed: up to $50 million a day and rising. Sydney Morning Herald. Retrieved 10 July 2020, from the Sydney Morning Herald website. 

National Bushfire Recovery Agency. (2020). Funding. Retrieved 22 September 2020, from the National Bushfire Recovery Agency website. 

NSW Department of Planning, Industry and Environment. (2020). Annual exceedances. Retrieved 22 September 2020, from the NSW Department of Planning, Industry and Environment website. 

Parliament of Victoria. (2020). Bushfire 2019-20. Retrieved 30 June 2020, from the Parliament of Victoria website. 

Reserve Bank of Australia. (2020). Macroeconomic effects of the drought and bushfires. Statement of Monetary Policy – February 2020. Retrieved 21 July 2020, from the Reserve Bank of Australia website. 

Royal Commission into National Natural Disaster Arrangements (2020). Royal Commission into National Natural Disaster Arrangements: Report.

Schweinsberg, S., Darcy, S. and Beirman, D., 2020. ‘Climate crisis’ and ‘bushfire disaster’: Implications for tourism from the involvement of social media in the 2019–2020 Australian bushfires. Journal of Hospitality and Tourism Management.

State Government of Victoria. (2020). Financial support – bushfire recovery. Retrieved 29 July 2020, from the Business Victoria website. 

Walters, G., & Clulow, V. (2010). The tourism market's response to the 2009 black Saturday bushfires: The case of Gippsland. Journal of Travel & Tourism Marketing, 27(8), 844-857.

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2009 Victorian Bushfires Royal Commission. (2010). 2009 Victorian Bushfires Royal Commission: Final Report.

Appendix

Footnotes

[1] Centre of Policy Studies, Victoria University, Melbourne

[2] We would like to thank Andrew O’Keefe, Georgina Grant, Gillian Thornton, Hao Wang, Marcella Choy and Maryam Nasiri for their kind comments and suggestions. The views expressed are those of the authors and do not necessarily reflect the views of DTF.

[3] The full Dynamic VU-TERM model contains 195 sectors. For modelling practicalities, the database was aggregated to 26 sectors.

[4] Capital loss is calculated as the number of lost assets based on media reports multiplied by their estimated average replacement costs.

[5] Loss of labour productivity is calculated based on the number of days with hazardous smoke levels and the cost of each hazardous day estimated by Terry Rawnsley in Irvine (2019), while the estimated increase in insurance premiums is based on published media reports.

[6] There is lack of information on capital destruction and insurance payout in the regions outside North East Victoria and East Gippsland as there was no material bushfire in those regions.

[7] This is consistent with academic evidence such as Walters and Clulow (2010) who find that the negative tourism perception following the 2009 Victorian bushfires persists longer in markets that are more distant from Victoria.

[8] Based on estimate by the Australian Tourism Export Council in Carruthers (2020) along with subjective judgement.

[9] This assumed decline in tourism accounts for $1.4 billion welfare loss at net present value. This welfare loss is approximately scalable for sensitivity analysis.

[10] From idcommunity, an organisation delivering suburb-based community profiles to councils across Australia and New Zealand.