Western Australia is expected to deliver a $1.7 billion budget surplus, while the national budget is likely to record a deficit of around $83 billion.
This week will offer up two contrasting budgets, with the expectation that Western Australia will deliver a $1.7 billion surplus, while the national budget is likely to record a deficit of around $83 billion.
The WA economy is yet again proving to be far more resilient than those of other states and territories, supporting WA’s stronger fiscal position.
This has been driven by two key factors: the ability to keep COVID-19 out of the state and maintain business activity, and the performance of the resources sector. But we shouldn’t necessarily wed ourselves to the idea that a surplus is good and deficit is bad.
The delivery of a budget surplus is too often used as a political football between parties. A surplus shows prudent management of the public finances, so the narrative goes, while deficits betray the fiscal irresponsibility of a spendthrift government.
There is a golden rule in public finance that sanctions governments to borrow only to invest, and not to use borrowing to support recurrent public spending.
The quid pro quo is that the government should run a recurrent budget that balances, or delivers a surplus, over the economic cycle.
This last caveat is critically important. The golden rule expressly supports the idea that governments can – and in some circumstances should – borrow to invest.
This is especially relevant during economic downturns, when investment and temporary fiscal support can help to push through a downturn.
December’s forecast was for a $2.6 billion surplus for 2019-20, followed by $2.7 billion in the two following years.
Although down from December expectations, Treasurer Ben Wyatt’s delivery of a surplus, in the face of a global pandemic, is no mean feat.
Revenues from royalties have remained strong, with iron ore prices well ahead of forecasts. This will have financed a good share of the $5.5 billion WA Recovery Plan announced by Mark McGowan in July, with the $5.4 billion royalty income from iron ore expected to be much higher. What the government commits to next year is a different story.
The golden rule provides governments with a rationale to borrow in the short term, if the intention is to grow out of a downturn. The challenge at this point is to build in an economic recovery plan that is enough, but doesn’t overshoot.
So what ought to be in the treasurer’s prescription for WA’s economic recovery? The plan for economic recovery needs to focus squarely on job retention and job creation.
To date, the WA labour market has held up better than those of other states and territories, but there is still some way to go before we can be sure of a complete recovery in jobs (and these need to be of sufficient quality and hours).
We also need to be forward thinking in building greater resilience into the WA economy through diversifying both our markets and trading partners. In tuning the state’s engine of jobs and growth, a smart industry specialisation strategy could become one of the most important tools in the treasurer’s toolbox.
One of the main impediments to sustaining the state’s economic growth path could come from the low population growth, and especially skilled migration.
WA has unarguably benefited from its stance on hard borders, but continuing with a closed economy approach will take us only so far, and will carry only a subset of businesses.
Slower population growth will also begin to impact on a number of industries and places downward pressure on consumption, housing markets and economic growth.
WA is in a great position to formulate a smart migration policy, one that will protect the skilled and diverse workforce that the state’s prosperity has been built on for so many years.
• Professor Alan Duncan is director of the Bankwest Curtin Economics Centre