Budget surprises

Budget surprises

The holiday season is usually a slow news period, but one very important announcement that came out between Christmas and new year was the state government’s mid-year budget review.

It was packed with several importance pieces of news.

In it, Treasury dramatically revised its economic growth forecast for 2007-08 from 4.5 per cent to 7.0 per cent. This led to further strong growth in revenue, lifting the budget surplus from a forecast $1.45 billion to $1.83 billion.

The government has put aside a further $3.5 billion for infrastructure spending, as it seeks to deal with rising labour and construction costs.

This includes a big increase in its budget for the proposed Fiona Stanley Hospital, which has risen from $1.09 billion $1.76 billion. This was attributed to design changes.

The government has also made extra provision for its office of shared services, which seems to have turned into a disaster zone for all involved.

The government, its original adviser Deloitte Consulting, and its main contractors Oracle and ASG Group, must all be ruing their involvement in this highly ambitious but trouble-prone project.

The project is seeking to bring together a range of finance, human resources and payroll functions from government departments into a single centralised agency.

It was originally meant to cost $91 million over four years but the government has twice increased its budget.

In December, it increased the budget by a further $250 million, lifting the direct cost to $450 million. The government has also pushed out the date for projected savings and scaled back the magnitude of those saving.

Lessons to learn

There are many lessons to be drawn from all of the above developments.

In regard to the economic outlook, the increase in Treasury’s growth forecast brought it into line with the long-standing forecast of the Chamber of Commerce and Industry, which is expecting annual growth of 6.5 per cent.

A commonly held view is that Treasury deliberately issues conservative growth forecasts, in order to hold down revenue projections and therefore restrain the ambitions of spending ministers.

That might have been the case in the past, but its not an acceptable practice, especially when Treasury is forced year after year to revise its budget surplus estimates.

The revised growth forecast – coupled with CCI’s forecast of continued strong economic growth over at least the next four years – makes it increasingly difficult for the government to resist major tax cuts.

Treasurer Eric Ripper repeatedly asserts that it would be imprudent for the government to implement further big tax cuts.

That line of argument would be plausible if there were credible and realistic threats to the state’s growth outlook.

That is not the case, judging by the commentary coming from economists across the country.

Mr Ripper also points, with justification, to the cost pressures facing the government in both recurrent spending and capital works.

Like every other employer and project developer in Western Australia, the government is facing higher salary costs and higher construction costs.

Realistic reform

Against this backdrop, there is an increased onus on the state government to pursue smarter and more efficient ways of running the state.

It is widely recognised that government agencies are struggling to cope with the loss of senior and experienced staff to better-paying jobs in the private sector.

This makes it particularly difficult for the government agencies to cope with increased workloads associated with the mining, infrastructure and property booms in WA.

The same issues apply at local council level.

Hence there is a lot of value in exploring ways for government agencies to partner with the private sector, such as by increasing their use of private sector contractors to perform tasks traditionally handled by permanent staff.

Property developers have been calling for this type of reform for years, but have been met with resistance.

Smarter use of technology is also worth pursuing, like the automated project approvals system adopted by a several local authorities and some of the state’s residential housing developers.

Unfortunately, the shared services project could discourage the pursuit of new technology solutions.

What it should discourage is the pursuit of overly ambitious projects.

Auditor General Colin Murphy made this clear in his review of the shared services project, released earlier this year.

He concluded that, from the outset, the WA model for shared services was optimistic and the implementation plans ambitious for the size and complexity of such a project, which involved using untried software and a ‘big bang’ implementation approach.
He added that the governance arrangements were inadequate to oversee such a high-risk project, resulting in blurred lines of responsibility and what was essentially ‘management by committee’.

Importantly, he didn’t conclude the project was a complete waste, but he did highlight the work needed to make it operate properly.