10/03/2011 - 00:00

Beware if the revenue is ‘lumpy’

10/03/2011 - 00:00

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The government is hoping to hose down expectations that the state is awash with money.

Beware if the revenue is ‘lumpy’

IT didn’t take Treasurer Christian Porter long to swing into action to dampen expectations after the stunning budget surplus just six months into the financial year.

Naturally, Mr Porter was quick to mention the strength of the state’s finances based on successful negotiations to remove concessions some iron ore miners have been enjoying.

“Nevertheless, the government will continue to be disciplined in its spending management going into the 2011-12 state budget,” he added.

The half-year result is good in anyone’s book. The surplus came in at $1.1 billion, compared with a deficit of $259 million for the same period just 12 months ago.

And with the surplus for the full year tipped to be $758 million when the last budget was presented in May, it’s reasonable to assume the final result will be close to $2 billion.

But the State Treasury is nothing if not conservative in its forecasts. That’s why Mr Porter pointed to “lumpy” revenue growth. That’s Treasury speak for meaning the money doesn’t come in a steady stream throughout the year. It’s more like fits and starts.

‘Lumpy’ has been a favourite Treasury term for 35 years, and possibly longer. I first heard it when Les McCarrey was under-treasurer in the 1970s during Sir Charles Court’s term as premier. And it has popped up regularly ever since. The message is: don’t expect there to be such big revenue ‘lumps’ during the second six months.

Nevertheless revenue is up by a spectacular $2.1 billion, or 21 per cent. The main driving forces are royalty income (up $964 million on a year ago) and taxation (up $509 million).

These more than offset reduced contributions from the property and retail sectors (down $89 million) and the goods and services tax (down $19 million).

But there were some one-offs on the revenue side. They included Rio Tinto and BHP Billiton’s ‘contribution’ of $350 million after changes to State Agreement Acts, and a $55 million back payment linked with Robe River operations.

Spending was also well ahead of a year ago, at 7.3 per cent, with the blame being directed at higher grants and a one-off payroll tax rebate.

Dampening expectations after good results is a time-honoured Treasury strategy for a number of reasons.

First, it sends a message to other sections of government – especially the big spending portfolios of health and education, as well as deserving but traditionally under-resourced areas such as community services – not to raise their hopes for spending increases too high.

Also, calls usually surface for relief on taxes and charges. For instance, opposition leader Eric Ripper was quick to urge the government to freeze power prices for the next 12 months. Mr Porter was just as quick to reject the call, saying a freeze would “wreck the state economy”.

Mr Ripper is no stranger to the Treasury line himself, having delivered eight budgets, including the first to return a surplus of more than $2 billion, during the Gallop and Carpenter years.

Then there’s always the risk that economic growth will be choked off and the revenue growth prove temporary. That’s why Treasury is loath to endorse early concessions, which might have to be removed if things turn bad. There is also the possible backlash against the government of the day should that occur; unwelcome at any time but especially if an election is approaching.

One potentially dangerous area for the government is the rise in state debt. It now stands at $10.3 billion, which is $446 million more than a year ago, and more than double the debt level at the change of government more than two years ago.

Premier Colin Barnett has defended the increase, saying that if the money is being ploughed into projects that will serve the state for years – ports, hospitals, schools and roads – it is permissible, within certain limits.

He says there are decisions on major projects that are long overdue and which will require the borrowing of money. The projects included reshaping the Perth waterfront and the new sports stadium. The next budget is expected to earmark $270 million for the waterfront, and the new sports stadium will cost well over $1 billion.

The premier was non-committal on whether he would tolerate debt growing to $20 billion by 2015, but gave an assurance that the level of debt would “remain well below 4.5 per cent of our revenue”.

That is significant because ratings agencies such as Moody’s watch such levels closely, and exceeding that limit could put Western Australia’s AAA credit rating at risk, making it more expensive to borrow money. And that would mean less money for public services.

The latest budget figures are good economically but present a tricky political path for Mr Barnett and his team.

The next election is still two years away. The government has caused significant pain for voters in the first two years, increasing electricity charges by 46 per cent, and water rates by 29 per cent. In each case the blame has been palmed off to the previous Labor administration for failing to keep abreast of rising production costs.

Further increases have been flagged in the next budget in May, but the potential pain has been sugar coated by reassurances that the increases will be significantly lower than for the past two years. Then a smaller increase – or perhaps none at all – could occur in the pre-election budget in May 2012.

All premiers want to keep their political powder dry until the time they will get the loudest bang. If anyone knows that, it’s Eric Ripper. And he will campaign loud and long to ensure maximum embarrassment for the government, the longer the delay in providing relief.

And it’s not just families. Small business is also looking for relief from escalating power charges, which were pegged for years, starting with Richard Court’s government in the 1990s, when the cost of electricity was well ahead of other states. The idea was to make WA charges more competitive, and help not only families but businesses as well.

It’s a delicate political juggling act for the premier. At present he’s riding high with strong personal approval from voters and his government comfortably ahead of Labor in the polls. But should that popularity start to fade, he might be forced to turn the political timetable on its head.

All the predictions are for royalty revenue to continue to grow strongly as more iron ore is extracted for export. Payroll tax is also tipped to rise as the workforce expands, and a recovery in the real estate market would lead to a jump in stamp duty revenue.

Mr Porter and his Treasury boffins will be watching the revenue and expenditure tables like hawks. The last thing they want is an impression that WA is awash with money.

Mr Barnett is doing his bit, consistently batting back suggestions that the state is heading for another boom.

“We are entering a long-term period of prosperity,” he said on ABC Radio last week adding, “Booms end up out of control.”

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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