Paula Gadsby: WA’s Budget way ahead of the rest of Australia

WA’s Budget is in a strong position and the envy of other State and Territory treasurers.

It shows that WA expects to bank its sixth consecutive operating surplus (of over $3 billion) in 2023-24. Beyond that, WA is expected to have $2 billion plus surpluses over the next four years.

It’s a fiscal position other States and Territories can only dream of.

WA has come a long way over the last decade, having record-high net debt and losing its AAA credit rating in 2013. It re-gained the coveted AAA credit rating in 2022 and became the only State or Territory to hold that top position.

More importantly, net debt as a percentage of gross state product — an indicator of a government’s ability to service its debt — is expected to be just over 6 per cent this financial year. By comparison, Victoria and NSW are currently sitting at 17 and 16 per cent respectively. On current projections, WA’s ratio is expected to remain relatively low, while the others will rise to new records.

WA’s success has been a mix of prudent policies (such as the strict public sector wages cap and paying down debt), a strong pandemic recovery and, of course, high commodity prices. It can also be attributed to WA receiving a bigger share of GST and, more recently, strong property market conditions.

But many of these factors that have been a boon for WA are not guaranteed into the future.

As we inch closer to the March election, and the temptation to spend grows, ensuring the State maintains a strong budget position is critical.

It’s important to remember what WA has been through in the past. It can be a painful adjustment when economic activity slows and commodity prices fall. Tough decisions must be made to keep the budget in good shape.

Every $US1 fall in the iron ore price leads to a $94 million fall in royalty revenue, according to WA Treasury. This makes iron ore royalties the state’s most volatile revenue source and, at around 20 per cent of total revenue, it’s a big share to be subject to unpredictable global market conditions.

While WA Treasury has relatively conservative iron ore price forecasts, which provides somewhat of a buffer, volatility is still a risk. And we can’t ignore that other states are now beating the GST drum, given their own fiscal positions.

WA’s net debt levels remain low (at just over $28 billion in FY24) but this is forecast to rise to nearly $41 billion in FY28 to fund record infrastructure investment — which is currently estimated to total over $42 billion over the next four years.

When WA lost its AAA credit rating, it was because debt was on a trajectory to accelerate to $38 billion by 2019, and iron ore prices started to fall.

This outcome leads to a higher interest rate on debt, as investors need to be compensated for holding it. A bigger interest bill means government spending is drawn away from other services and priorities.

With economic and revenue growth expected to slow — thanks to interest rates remaining higher for longer — and costs blowout on major infrastructure projects, it’s prudent for all governments, not just WA, to continue to pay down debt, rather than increase it.

There is no doubt the WA Government will need extraordinary discipline to keep spending under control in the face of the strongest population growth of the nation, and when critical infrastructure is in such demand.

On top of that, there are long-term, structural pressures on the budget, such as an ageing population and the need to invest in the energy transition.

But for WA to remain the envy of the other States — beyond its amazing weather, lifestyle and quokkas — its fiscal position needs to remain strong.

Fiscal sustainability — which is the ability of government to maintain public finances at a credible and serviceable position over the long-term — is a requirement for macroeconomic stability and sustainable long-term growth.

It means a fairer outlook for all, particularly the next generation, who should not have to carry the burden of debt.

And it means that if another crisis were to hit — health or economic — the Government can step in to cushion the economy, and keep all West Australians protected.

Maintaining fiscal discipline, and delivering strong budgets, ultimately benefits all West Australians.

Paula Gadsby is senior economist at EY Australia and is based in Perth.