11/03/2009 - 22:00

Economy puts fledgling government in a political pickle

11/03/2009 - 22:00


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The financial crisis is a major challenge for governments as well as business.

GIVEN his background in small business, Treasurer Troy Buswell could well have faced his current predicament even if he'd stayed out of politics.

The financial dilemma confronting the Liberal state government in its first budget is very similar to that of thousands of small businesses, especially those that have been hooked into the booming resources sector for the past five years and enjoyed unprecedented growth.

Suddenly, revenue has fallen off a cliff. Expenses that ballooned in the good years are hard to address quickly and debts are starting to mount.

For many small businesses, such a position is fatal. For a big entity like the state of Western Australia, the consequences are less dire in the short term. They may, however, impact on the credibility of the fledgling government in terms of meeting election promises, managing the existing state services and setting up WA for the future.

The squeeze Mr Buswell faces was evident in the state's mid-year financial projections statement.

Revenue that was supposed to be up more than 10 per cent in 2007-08 has slumped to 3.6 per cent, and expenses growth had blown out to 12 per cent, wiping more than $1 billion off the surplus.

More importantly, looking ahead to 2011-12, revenue is expected to barely move while expenses keep rising ahead of inflation, blowing out state debt from the $3.63 billion previously budgeted for this financial year to $16.7 billion. That is double the forecast in last year's state budget.

The result is a potential net debt-to-revenue ratio of 60.9 per cent in the year prior to the next scheduled election.

And those numbers are already out of date. Mr Buswell cited revenue growth of 13.1 per cent in his most recent statement.

Most with a working knowledge of the budget drivers believe the final numbers will be much worse than those predicted in the latest review, as the housing slump deepens, commodity prices fall and public servants hang on keenly to jobs.

Slashing the capital works program, such as the sports stadium, and a 3 per cent cut to public service spending have already made the headlines, but most expect more to come.

"2009 will be a year for bad news," WA Under-Treasurer Tim Marney told a recent Committee for Economic Development of Australia conference.

"We have had bad report after bad report in financial terms, now we'll get it in economic terms."

For most, a 3 per cent cut in spending, the so-called efficiency dividend, is not enough. The government, including Mr Marney, has made it clear that it doesn't think this is a considerable impost on the public service, especially in the context of significant growth in expenditure for several years.

"Three per cent is doable and, importantly, it is essential," Mr Marney said.

Despite baulking, and publicity stunts that some have dubbed obstructionism, the fact is that at a time of crisis the cuts are the same as those implemented by the new Labor federal government last year.

Traditionally such cuts are simply aimed at pruning off the spending commitments of previous regimes.

In light of what has happened to the economy - not to mention election promises that will force the government's hand on allocating the royalty revenue it does receive - that is simply not enough, according to some observers.

"If I was them by now I would have been out and announced way more than 3 per cent cuts," said one observer.

Some believe cuts of 6 per cent would be a more realistic way to deal with the issue at hand.

However, even number-driven economists understand that deep cuts at a time when people are looking to governments to keep the wheels of commerce turning may be counterproductive and, importantly, electorally dangerous.

"We have had an explosion of the public service under Labor but no government is going to be laying people off and putting them on the streets, so they will carry a lot of costs," said another budget watcher.

While the former Labor treasurer, Eric Ripper, who now leads the opposition, has been criticised for failing to heed warnings about the legacy of an expensive public service, even the government acknowledges that things could have been a lot worse.

Mr Marney points out that even the dramatic forecast rise in debt by 2011-12 to almost $17 billion is nothing compared to what could have been if the past few years' surpluses had been squandered as many have suggested.

"If surpluses had been spent the debt would have been $30 billion by 2012," Mr Marney said.

That would have taken the state's benchmark net debt to revenue ratio to more than 170 per cent, well over three times its self-imposed target ceiling of 47 per cent.

One of the areas where government and business appear to be broadly speaking the same language is on reform of the public service.

In his recent presentation Mr Marney pointed out the rising cost of health and education, among other things, without a commensurate increase in performance compared to other states. While not being specific he said structural change was needed to improve this, describing it as a re-engineering that would maximise value for money.

This may be music to the ears of the Chamber of Commerce and Industry WA, which offered direct advice in its pre-budget submission to make the public service operate more effectively.

The business lobby group suggested the introduction of: performance agreements with agency heads; meaningful and measurable key performance indicators for them and their agencies, which should be agreed and published annually; and the development of a clear strategic direction and key performance measures for service areas.

"This requires agency heads to be accountable for the actions of their agencies," the chamber stated.

But CCIWA and the government are not necessarily on the same page in this area.

The lobby group wants to see a reduction in the number of departments and agencies, in contrast to the early actions of Colin Barnett's government, which broke up two of the mega departments created by its predecessor.

Business will also want to see the state held to account for its $250 million election tax cut commitment. While some of that has already been accounted for with property-based tax reductions, business will repeat its oft-echoed call for the rest to be applied to reducing the payroll tax rate.

As attractive as cutting a tax on jobs may seem, the problem for Mr Barnett and Mr Buswell is that reducing payroll tax is a double negative because of the way the Commonwealth grants system works in doling out GST receipts.

The GST money is distributed on a complex formula that takes into account state revenue, both real and theoretical. For instance, an average per capita gambling income is added to WA's revenue even though the state doesn't have significant revenue from that source. Theoretically we can, so it's counted.

The same goes for payroll tax.

Exacerbating that is the five-year rolling period that grants are based on, which means WA will receive less funding in the next few years to take account of the boom time income that it was receiving.

Mr Barnett raised the issue last week that WA's GST distribution was falling to a point where, on a per capita basis, we'll get 50 per cent or 60 per cent of that received by other states. He said this was not sustainable and thinks it ought to be capped at 80 per cent.

However, most close watchers of the process think it's too late for WA to cry poor after accepting net positive GST grants in past years.

"They should be reflecting the population of the state," opposition Treasury spokesman Ben Wyatt said.

"It is a pity he (Mr Barnett) didn't think of that when he was part of the government that made the original agreement."


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