AAA retention a challenge for Labor

Opinion: Having made solid progress in reducing its budget deficit, the pressure is on the state government to introduce structural economic reform.

Ben Wyatt should be justifiably pleased with the final report of the 2017-18 budget, which shows a deficit for the past financial year of just $618 million.

This figure is less than one third of that forecast in September last year.

In the nine months to June this year, the deficit has been cut from the initial Treasury prediction of $2.3 billion at an average rate of almost $200 million a month.

That’s an astonishing result, but it’s only the start.

If the current trajectory continues, the budget could be back in surplus by mid next year.

And while that’s unlikely, it’s reasonable to assume that the state’s finances will return to the black during 2019-20, 12 months earlier than first predicted.

Such a result would be a feather in the government’s cap, and that of its treasurer, Mr Wyatt.

And Labor would be expected to play it up as the 2021 election draws closer (never mind the pain caused to householders by the steep increases in power and water charges, and the broken election promise on taxation).

In the normal course of events the hit on taxpayers, despite the ultimate result, would be bread and butter for an opportunistic opposition to exploit.

But Mike Nahan and his team have a problem.

It was their government that left the legacy of a record budget deficit ($3 billion) and state debt (tipped to hit $40.8 billion in 2019-20).

Nevertheless, a combination of tough cuts in the public sector and early signs of increased economic activity, combined with a better deal from the Commonwealth on the GST, have left the Treasury coffers in much better shape.

So, is an early return to the holy grail of public sector finance, the AAA credit rating lost in 2013-14, on the cards? Not according to economist John Nicolaou, who heads up the Perth office of national consulting firm ACIL Allen Consulting.

“The reality is that WA is still straddled with a significant debt burden ($34.6 billion last June), which carries with it a growing interest bill (more than $1 billion annually), so there is still more to be done to ensure the budget is on a sustainable footing longer term,” Mr Nicolaou said.

“This means there cannot be any loosening of the tight reins the treasurer has had on spending, over the coming years, even as the revenue grows; it means that the McGowan government needs to show the courage to implement bold structural reforms to the public sector to further improve its operating position. And it means that it should continue to explore ways in which it can improve its balance sheet through the privatisation of assets and entities.”

Mr Nicolaou’s reference to privatisation will likely concern many Labor supporters and sections of the union movement.

Labor exploited the previous government’s privatisation plans for Western Power ahead of the last election to considerable advantage.

“Everyone knows that when you privatise state-owned utilities, power prices go up and services go down,” Mark McGowan warned during the election campaign.

His push was helped by the Liberals’ half-hearted stance on the issue.

Then treasurer Mike Nahan was strongly in favour of privatisation to help get the state’s books into better shape, while his premier, Colin Barnett, had always been lukewarm at best on the idea.

Labor was able to exploit the confused Liberal stance.

As it transpired, the new government imposed steep increases in power charges anyway.

The immediate outlook for the state’s economy is encouraging.

While the retail and property sectors remain subdued, the signs are good for WA’s traditional strengths of the resource and agricultural industries.

And growth there usually has a valuable knock-on effect, especially on the all-important component of confidence.

Mr Nicolaou said regaining the AAA credit rating would be within the government’s reach, but several hurdles must first be cleared.

“The first test will be to return the budget to surplus, but ultimately the real test will be how successful it is in driving down net debt,” he said.

“Running budget surpluses alone will unlikely deliver the AAA rating, but budget surpluses in concert with a program of structural reforms and asset sales, would.”

The ball is in Mr Wyatt’s court.