Doing it tough amid prosperity

Colin Barnett is in danger of losing the PR battle over the reasons he's asking Western Australians to tighten their belts.

Almost six months into his Liberal-National government’s second term, Colin Barnett has a major problem – and if it is mishandled, there will be political consequences.

The problem is that after 10 years of close to record economic growth in Western Australia, reflected in several billion dollar-plus budget surpluses, the level of investment in new resources-based projects is slowing down.

That means the rate of growth in government revenue is also slowing down. However that is not reflected in the pressure on government spending, as new infrastructure and services attempt to keep pace with the demands of a growing population.

So, after the rails run that WA has enjoyed during the past decade – riding on the coat tails of the Chinese economic boom – it’s time for some belt tightening. And for a state that has become accustomed to the ‘ask and you shall receive’ mentality, that is not easy  – especially if you are in government. It’s hard to say no in a climate of apparent affluence.

This partly explains why the premier was always reluctant to call the extraordinary recent growth rates a ‘boom’. ‘Busts’ inevitably follow booms, and while that hasn’t happened, the steam certainly is coming out of the system.

It was the mishandling of the property boom by Sir David Brand’s administration that played a significant part in the downfall of that coalition government in 1971. Perth land prices in the 1960s took off in association with the massive investment and population increase linked with the opening up of the Pilbara iron ore province.

Sir David did all he could to ease the pressure on the property market, but some concerted campaigning by the Labor Party took its toll, and his record 12-year term in power came to an end. Western Australians showed they were no longer impressed solely by strong growth figures. 

Forward estimates released with Treasurer Troy Buswell’s recent budget show the current government’s problem starkly enough. In this year’s budget, revenue and spending are both projected to grow by between 8 and 9 per cent, resulting in a useful forecast surplus of $386 million.

It gets tougher after that. In 2014-15, government spending is expected to rise by $473 million. But as noted in Political Perspective on August 15, revenue is predicted to actually drop by $61 million, with the result being a budget deficit of $147 million.

The obvious question is: if the economy is growing, how could the government’s forecast revenue actually drop?

The explanation lies in the structure of the budget, and the fact that, just as revenue surged during Eric Ripper’s term as treasurer in the days of the turbo-charged economy, changed conditions result in a contraction. As an exporting state, WA relies heavily on iron ore royalties – hence the price of iron ore is important – and exchange rates. Both, of course, are outside the government’s control.

Another important revenue source outside Mr Barnett and Mr Buswell’s control is the refund of money raised through the GST. That continues to shrink under the terms of the Commonwealth Grants Commission formula designed to deliver roughly equal services to Australians, no matter where they live.

As Western Australians were beneficiaries of that reallocation of state revenue up until relatively recently, WA’s criticism of the current redistribution too easily attracts claims of whingeing from some other states. So pleas for reform in that area have so far fallen on deaf ears.

The story since last month’s budget has been all bad news: the massive cost blow out on the restoration of the Muja A and B coal fired units at Collie; the back-tracking over moves to reduce the payments for electricity generated by domestic solar panels; the decision to cut 500 jobs in the Education Department; and the advice that some schools face closure or amalgamation over the next few years in the name of the more efficient delivery of services.

Then there’s the push to amalgamate local councils. The case for reduction is strong, but the implementation means many fiefdoms are upset – and that inevitably provokes a backlash.

So Mr Barnett has a big challenge on his hands. So far in this term he hasn’t fared too well and, despite the merits of some of the changes, he is in danger of losing the public relations war.

Remember the opposition to the Northbridge tunnel? Some of its strongest detractors at the time are now its most enthusiastic supporters. And the Belltower? The main comment now is that it should have been bigger.

WA does not quite qualify for the term ‘private wealth and public squalor’ coined by the American economist John Kenneth Galbraith in the 1950s, but Mr Barnett needs to explain carefully why belts are being tightened during a period of apparent affluence.

His challenge is to implement the spending cuts equitably. If he doesn’t, it could just bring him down.