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The billions in debt behind WA’s black ink budget

Josh Adamson

Josh Adamson

Josh is Research Manager at Mannkal.
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Behind the headline black ink in Ben Wyatt’s 2020 state budget is an indulgent and self-interested fiscal stimulus.

Ben Wyatt’s $1.2-billion budget surplus this year comes off the back of higher-than-forecast iron ore prices, which are being fuelled by Chinese COVID-19 stimulus and a contraction in Brazilian supply. This is not the first time our mining sector has protected the state, or nation, in times of economic turmoil, and it won’t be the last.

Behind the headline black ink in the 2020 state budget, however, is an indulgent and self-interested fiscal stimulus and an indication by the McGowan government that it is content to grow the size and scope of the state’s responsibilities. This will likely become the political norm as the world ushers in a new age of big-spending fiscal policy.

Net public sector debt is increasing significantly; under current projections, it will grow to $42.9 billion by 2023-24. This is up $8.3 billion over the next four years compared to pre-COVID estimates in December.

Mr Wyatt should, however, be commended for ignoring criticism from the state and federal Liberal parties who appear to have drifted from their fiscally conservative foundations.

The state’s opposition leader and shadow treasurer have both made baseless calls for additional stimulus for small businesses and households, despite already extraordinary fiscal measures being taken.

Infrastructure spending is the primary stimulus response by the state to combat the impact of COVID-19, and the principal reason for the major increase in public debt.

A considerable $27.9 billion will be spent by the state over the next four years on infrastructure projects with the aim of creating about 10,000 jobs. This includes $5.7 billion to be spent on Metronet projects and $2.39 billion on road infrastructure.

The Mannkal Economic Education Foundation warned against expediting infrastructure spending of this type in its recent paper A Road to Somewhere: Depoliticising Infrastructure Decisions in Western Australia. These investments make the government of the day popular because Western Australians see the temporary boost to employment and the delivery of new (albeit often unessential and/or uneconomic) infrastructure.

What voters do not see, however, is the impending debt and economic distortions, which future governments and taxpayers must pay for and fix as a result of infrastructure malinvestment.

In their infrastructure cash-splash the state government has notably opted not to utilise the expertise of the newly established Infrastructure Western Australia body.

Ideally, the purpose of this body would be to scrutinise politically motivated infrastructure projects and ensure taxpayers are funding only those projects that deliver real long-term benefits and value to the state.

In addition, Mr Wyatt has hyped the strength of the WA economy in the face of the coronavirus crisis, while simultaneously freezing tariffs on electricity, water, motor vehicle charges and public transport. It is an oxymoronic stance to take in a supposedly strong economy, where household income support has been bolstered to record highs.

The policy is shrouded in short termism and should be seen by voters as such. All of these entities are owned by taxpayers, and charge less than the cost of provision for their services.

As a result, any shortfalls in revenue are inevitably paid by all Western Australians through grants and subsidies or by running up public debt.

The Public Transport Authority of WA, for example, are budgeted to receive $872 million in operating subsidies from the state government over the next year.

Synergy had its operating subsidy cut off in 2018 but now funds the gap between its expenses and revenue through debt. This gap, and the debt and interest payments required to fund it, will continue to rise because the state government sets the price households pay for electricity below what it costs to supply it.

For this reason, freezing the rates Synergy and other state-owned entities are able to charge, while politically popular, is actually detrimental to taxpayers in the long term as public utilities become increasingly uncommercial and indebted.

The $665 million payout the state received from the liquidation of the Bell Group and fed to households as an $600 electricity credit is merely a ploy to consolidate and expand its voter base ahead of the March election.

If Mr Wyatt and Energy Minister Bill Johnston were serious about reducing electricity bills for households, the money should have been used to pay down Synergy’s $1 billion of accumulated debt, as well as reforming pricing structures in the electricity market.

The majority of the public currently support the premier taking a hard-line approach to the state’s borders, but this has been unquestionably aided by the fact that, for the majority of Western Australians, life has remained relatively unchanged through the COVID-19 crisis.

There is uncertainty around when the state government will reopen its border, but the longer Mr McGowan sustains his protectionist stance, the greater the economic costs to the state will be.

Hard borders will become less popular with voters, and more damaging to the overall health of the economy, as iron ore prices retreat from current highs. This may be slightly offset by increases in gold royalties, but the government must still address an unemployment rate that will continue to sit around historically high levels of between 7 per cent and 8 per cent. This will become increasingly important, given most of the jobs created in recent months have been part-time roles, meaning there is significant underemployment in the workforce.

In addition, structural employment will likely increase once the stimulus measures used to supposedly create construction jobs dry up over the next two years. These workers will be forced to retrain and shift to new industries, in a similar vein to the end of the mining investment boom.

The word unprecedented has been thrown around far too often in 2020, and certainly does not describe the situation in WA. It is important to not let COVID-19 exceptionalism permit unnecessary largesse by our government which, in actuality, is a masked attempt to gain electoral favour.

The next election is looking to be a landslide victory for the Labor government; however, voters should not be misled by short-termism which merely shifts the significant cost burdens our state faces to future generations. 

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