Bedding down WA’s budget reform
Western Australia (WA)’s second state budget in eight months, delivered on 8 May, revealed promising signs of improvement for the state’s finances. In an address hosted by Western Australian Treasury Corporation in Sydney on 31 May, state treasurer Ben Wyatt cited public expense reform, improving commodity prices and the emergence of lithium as a major export, as key factors in what he describes as the best WA budget position across forward estimates since the 2012/13 budget.
Following the election of a Labor government in March 2017, the WA 2017/18 state budget was delayed until September last year. At that time, the budget was characterised as one of fiscal restraint and reform. Wyatt says while the state’s fiscal trajectory has improved, the government’s second budget is about bedding down the improvements made in its first.
Hitting targets
Containing expense growth has been one of the key features in the government’s plan to reform state finances. Prior to the government’s first budget, public expense growth had been growing at an average of 6.7 per cent over the last decade. In 2017/18, the state is on track to lower this figure to 1.4 per cent and is aiming for a further reduction to 0.9 per cent in 2018/19. According to Wyatt this will be the lowest expense growth rate for WA in 20 years.
Measures to reduce the size and duplication of the public sector have been largely implemented since the 2017/18 budget. Legislation has been passed to freeze the pay of parliamentarians, judges and senior public servants and there has been a 20 per cent reduction in the senior executive service. Furthermore, the government has reduced the number of government agencies to 25 from 41.
“This has been one of the most significant reforms to the public sector in WA in recent memory,” Wyatt says. “Per head of population we are still a very expensive jurisdiction, but we are doing what we can to bring this under control."
One area where improvements continue to be necessary is in the state’s health expenses, which Wyatt says have “galloped” along at 8.8 per cent growth year-on-year. “This is not sustainable, and we have managed to pare this back through a combination of factors including tight wages policy,” says Wyatt.
The health budget, which currently accounts for one-third of WA’s total budget (see chart 1), is undergoing a review, due November 2018, with the aim of formulating a more sustainable long-term strategy, according to the treasurer.
Source: Western Australia state budget papers 1 June 2018
Decreasing the growth rate of public expenditure means the government will have to reprioritise the allocation of its investments. However, Wyatt says that the government has been able to deliver on the “majority of its election promises”.
The commitment made to reducing state debt is one area where the government can certainly point in evidence of this. The previously forecast growth in net debt is already down by A$3.2 billion (US$2.4 billion) since the 2017/18 budget, resulting in a decreased borrowing programme for the forthcoming financial year.
Net debt as a share of gross state product (GSP) is expected to peak at 14.6 per cent in 2019/20, while improving revenue growth is expected to result in a net-operating surplus in 2020-21 (see table 1).
Table 1: Western Australia net operating balance and net debt
| 2017/18 estimated actual | 2018/19 budget estimate | 2019/20 forward estimate | 2020/21 forward estimate | 2021/22 forward estimate | |
|---|---|---|---|---|---|
| General government sector | |||||
| Net operating balance (A$m) | -1,327 | -906 | -160 | 1,295 | 1,531 |
| Revenue (A$m) | 28,874 | 29,572 | 30,715 | 32,310 | 33,187 |
| Revenue growth (per cent) | 7.3 | 2.4 | 3.9 | 5.2 | 2.7 |
| Expenses (A$m) | 30,201 | 30,478 | 30,875 | 31,015 | 31,656 |
| Expense growth (per cent) | 2.8 | 0.9 | 1.3 | 0.5 | 2.1 |
| Total public sector | |||||
| Net debt at 30 June (A$m) | 35,951 | 39,103 | 40,853 | 40,413 | 39,745 |
| Net debt as share of GSP (per cent) | 13.7 | 14.5 | 14.6 | 13.9 | 13 |
Source: Western Australia state budget 2018/19
Rebounding
Having entered a recession in 2016/17, Wyatt is confident in the state’s improved forecast, citing several large mining projects over the forward estimates as well as improving household consumption and population growth.
WA’s fortunes remain centred around mining and resources. According to a recent ANZ Research note, the sector accounts for 30 per cent of state economic activity.
While the price of iron ore has been the basis for WA’s economic fluctuations in recent years, it is lithium where the treasurer sees the greatest potential for future growth. Indeed, according to Wyatt, WA’s revenue from lithium exports has been revised up by A$350 million over the forward estimates since the mid-year economic and financial outlook, as a result of volumes increasing dramatically.
“We have around 15 lithium projects in construction or at various stages of planning with a total value of just under A$5 billion,” says Wyatt. “WA’s export numbers are always swamped by the large amount of iron ore we export, but lithium has emerged rapidly, and we are expecting consumption to increase by 350 per cent by 2026 in our base-case scenario”.
This surge in lithium production and exports is also helping to drive results in relation to job creation, according to Wyatt. After shedding 17,000 jobs through 2015/16 and 2016/17, the government is expecting to create 50,000 jobs during 2017/18 and 2018/19.
However, the government is also focusing on diversifying growth and employment away from the resources sector, with funds being allocated to support tourism and infrastructure projects such as the Metronet public-transport programme, which will receive a total of A$2.2 billion in investment over the forward estimates.
According to budget papers, of the A$6.2 billion being allocated to infrastructure investment in the 2018/19 budget, A$4.6 billion is in transport, water and power (see chart 2).
Source: Western Australia Treasury Corporation 1 June 2018
Even the state’s GST returns are beginning to improve, to up to 47.3 per cent of its population share of the GST in 2018/19 from 34.4 per cent in 2017/18. According to Wyatt, this is forecast to increase to 64.9 per cent in 2021/22.
Wyatt says that he is willing to work constructively with the Commonwealth government around potential reforms to GST redistribution, particularly given the potential for a lithium boom to result in a similar GST redistribution outcome as the iron-ore boom.
Other key performance indicators, such as population growth and business investment are either improving or have troughed according to Wyatt. He admits these are unlikely to reach the record levels seen during the iron-ore price boom, however he believes the state is well-positioned to continue meeting its objective of long-term sustainable growth.