Back in black and on track: the 2019-20 State Budget

9th May 2019 · Ryan Buckland

A confluence of good news has seen the Western Australian Government's financial position improve out of sight on WA Treasury's estimates of just 12 months ago. Step back any further - say to the Premier Mark McGowan's now infamous "Great Depression" call following formation of Government - and the turnaround is quite remarkable.

The State's Treasurer, Ben Wyatt, delivered an Economic and Fiscal Outlook in April 2017, which forecast the State's Total Public Sector net debt would rise to $42.3 billion in the 2020 financial year. Two budgets later, that figure has been revised to $36.9 billion on an underlying basis. That comes despite the State not wavering from its commitments regarding transport infrastructure investment (a hefty $22.8 billion is earmarked for the State's Asset Investment Program over the forward estimates, a lift of $1.3 billion from last Budget), and prior to any material privatisation of government infrastructure or businesses hitting the books.

How have they done it? It is boring, and it is dull, and it doesn't win votes - yet - but the State Government has simply showed the fortitude to follow through on its central commitment to pare back spending in the Western Australian public sector. There's nothing flashy about it: a tight wages policy, scrutiny on agency spending, and (if ACIL Allen's experience working with State Government clients is any guide) a return of the primacy of central agencies as guardians of the State's financial performance.

To wit, the McGowan Government's first full Budget (handed down in September 2017) forecast General Government expenditure of $30.4 billion in the 2018-19 financial year, and $31.2 billion in 2019-20. In this year's Budget, the Estimated Actual for 2018-19 has come in at $29.4 billion, and the Budget Estimate for 2019-20 is $29.8 billion. That's around a $2.4 billion reduction on the Government's first estimates for those two financial years.

While all of the talk has centred on the sharp improvement in the State's revenue outlook, it is that outcome on expenditure which is worthy of the most praise. Addressing underlying issues in the recurrent expenditure base of the State Government means the State's financial capacity improves on an ongoing basis. It means temporary windfalls in revenue - such as the circa $2.1 billion upward revision to iron ore revenue over the forward estimates period, including a whopping $924 million upward revision in the 2019-20 year - can be treated as such.

Indeed, the State's revenue outlook has taken a turn for the negative on the whole, owing mostly to the impact of byzantine accounting rule changes (which have offsetting expenditure impacts) but also in part due to continued weakness in the State's own-source revenue base. The 2019-20 Budget also reflects the State's first following a review of WA Treasury's economic and revenue forecasting capacity, which may explain why an uptick in most of the State's economic projections - the core variables used in Treasury's revenue forecasting - has not been met with an improvement in payroll tax and other State taxes.

As has become the defining feature of this Government's budget papers, the "new measures" pages are remarkably short and mostly reflect modest tweaks to programmed spending in key agencies. The most significant are the introduction of a new Employer Incentive Scheme - though details on it are scarce in the Budget - funded by the tightening of some payroll tax exemptions, and an investment in the Department of Primary Industries and Regional Development following a comprehensive review of its capabilities. The $81 million investment in DPIRD has been characterised as the windback of substantial cuts made to the former Department of Agriculture and Food, and according to the Budget centre mostly on supporting primary producers, rebuilding scientific capability, and building export markets.

The foreshadowed lift in income limits for Keystart loan eligibility came to pass, though at only six months and with activity in sub-$500,000 part of the established housing market not a significant concern, it's not clear whether this measure will materially impact the State's languid housing market.

By contrast, targeted industry policy spending in tourism, aquaculture, energy transformation and international education can be expected to have a more noticeable impact, albeit at a smaller initial scale. In particular, a $22 million investment in Tourism WA's destination marketing and international aviation route development is welcome, with ACIL Allen research showing these two aspects of the State's tourism expenditure have the most material impact on the tourism industry.

The State has also continued to invest in targeted social policy initiatives, from medical research, methamphetamine, disability services and mental health. Like its industry policy program, we know from experience the State is looking at ways to deliver the best bang for its buck given the desire to limit growth in recurrent expenditure.

All told, the headline piece of information is the improvement in the Net Operating Balance of the General Government. The State Government's actions have improved the day to day operating position of the State by $4.1 billion on the same period last year, as demonstrated below.

 

The State Government has followed through on its commitments. It has delivered an operating surplus in the General Government sector, and is on track to deliver a Total Public Sector cash surplus - the first since 2007-08 (yes, since the 2008 financial year) - in 2020-21. After a decade of questionable management, the State's finances are back in the black and on track.

That alone creates a compelling narrative as we head into the second half of the McGowan Government's first term of Government. With some fiscal headroom, the opportunity is there for the State to be bold and build on its impressive record by undertaking the sorts of economic development and reform activities that can set Western Australia up for the years and decades ahead.