16/01/2020 - 16:09

Financial trade-off for Labor

16/01/2020 - 16:09

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OPINION: Mark McGowan and his Labor government are sitting pretty entering the final quarter of their first four-year term, with no obvious domestic issues likely to destabilise their approach to the next election in March 2021.

Financial trade-off for Labor
Mark McGowan has flagged a change of direction for the state’s finances. Photo: Gabriel Oliveira

OPINION: Uncertain global economic conditions will make any move by the McGowan government to loosen the purse strings a risky bet. 

Mark McGowan and his Labor government are sitting pretty entering the final quarter of their first four-year term, with no obvious domestic issues likely to destabilise their approach to the next election in March 2021.

Sure, economic growth could be stronger and, ideally, the retail sector could do with a bigger injection of confidence. And while the premier talks up the number of jobs created since Labor’s convincing election win in 2017, at which job creation was a key campaign promise, Western Australia’s unemployment rate remains stubbornly above the national average.

Meanwhile, there are welcome signs of life in the real estate market, and resources continue to drive activity.

On the other side, the Liberal Party under Liza Harvey is still searching for the major weakness in the McGowan armoury. It’s waiting for opposition frontbenchers to emerge who can consistently punch holes in the government’s shield.

Now, after three years of tight budgets and a significant increase in household charges, blamed on the budget deficits and growing state debt courtesy of Colin Barnett’s Liberal-National government, Mr McGowan has flagged a welcome change of direction.

In a pre-Christmas interview, he acknowledged that many householders were doing it tough, and hinted that his government was toying with the idea of freezing household charges in the May budget. That seems more than reasonable, given the current budget’s surplus is tipped to top $2 billion, with future budgets also expected to be healthily in the black.

Floating the idea of freezing household taxes and charges is one thing, delivering can be another.

The WA economy is dependent on world trade and exchange rates, based on iron ore and liquefied natural gas exports. At the moment, prices are strong and record sales provide a healthy injection of revenue into the state’s royalties basket.

In addition, the better deal on the GST rebate, which Mr McGowan negotiated with Prime Minister Scott Morrison before last year’s federal poll, also helps boost revenue. But there’s no guarantee that healthy world prices for iron ore and LNG will be maintained during the coming year, let alone the forecast GST revenue.

In fact things can change quickly; just ask Mr Barnett, who saw big hits to his government’s revenue (thanks to GST cuts and lower prices for resources) after his re-election in 2013. He had major spending commitments but dwindling revenue growth. The rest is history.

So Mr McGowan and his treasurer, Ben Wyatt, will be closely watching US President Donald Trump’s tweets on America’s trade war with China – WA’s major trading partner – and relations with Iran, after Mr Trump claimed credit for the assassination of Iran’s military leader, general Qasem Soleimani.

Unrest in the Middle East has the potential to destabilise oil supplies to world markets, including Australia, which relies significantly on petroleum coming through Singapore. Any reduction or uncertainty has the potential to push up fuel prices, with major impact on production and household costs.

The situation is similar with China. WA enjoys good relations with both the US and China and wants to upset neither. WA wants strong economic growth in China to continue as that means more iron ore and LNG sales – good for the WA economy and royalty income. Anything that might upset the cart is to be discouraged.

And then there is the GST revenue returned to WA. The initial budget projections have had to be written-down because of lower economic growth and reduced spending across the nation. That was before the disastrous bushfires that have devastated regional economies up and down the east coast, which will lead to further spending write-downs before a massive rebuilding effort kicks in.

From an economic perspective, the picture for 2020 is filled with uncertainty. The political consequences are clear. Bold predictions about loosening the belt, while attractive for political purposes, are fraught with risk financially.

Does Mr McGowan curry favour in the electorate by dispensing largesse in the face of unpredictability, or level with voters and say that, given the circumstances, that some caution is prudent?

A false move could be costly, politically and financially.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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