20/04/2017 - 12:19

Royalties for Regions cuts a sensible first step

20/04/2017 - 12:19

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OPINION: During the state election campaign, Mark McGowan said his government would repay the state’s debt as though it were a home mortgage; now, unfortunately, he is experiencing the equivalent of mortgage stress, which comes with taking on too much debt without enough income to service it.

Ben Wyatt is setting the scene for cuts to government spending.

OPINION: During the state election campaign, Mark McGowan said his government would repay the state’s debt as though it were a home mortgage; now, unfortunately, he is experiencing the equivalent of mortgage stress, which comes with taking on too much debt without enough income to service it.

Treasury’s pre-election financial review projected that debt would grow from $33.2 billion in June this year to $41.1 billion in June 2020. During the election, Labor said it would achieve a modest reduction in the forecast 2020 debt to $39.9 billion.

The new government could have got lucky and begun its term with better than expected GST payments, but the reverse has happened.

The most recent Treasury estimates, released on April 6, reveal that the economy is struggling and GST grants are not increasing as fast as had been anticipated. As a result, net debt is now forecast to increase to $42.3 billion by June 2020.

On current trends, the government will struggle to pay down any debt over its four-year term, and could leave a larger debt in June 2020 than was forecast when it was elected.

And, like homeowners with large mortgages, the government is also exposed to increases in interest rates, which are likely to occur over the next four years.

During the election campaign, Mr McGowan emphatically ruled out selling Western Power, which was the only measure that could have made a significant impact on the state’s debt, so the government will have to look elsewhere for cash.

The simplest and most significant cost saving would be to shut down the Royalties for Regions program. That would save $1 billion a year and $4 billion over the life of the government – about 10 per cent of the projected state debt.

There are two fundamental problems with Royalties for Regions that justify the program’s closure.

The first is that its funding is provided by a revenue stream that doesn’t really exist. The idea behind the program was to share the state’s mining royalty income with regional Western Australia. However, most of that royalty income is, in practice, already shared with the other states by the Commonwealth Grants Commission, which has reduced WA’s GST allocation to offset its mining royalty income.

The second problem is that Royalties for Regions is a ‘come and get it’ pool of cash which, by its nature, does not bring enough discipline to funding decisions.

In a well-run government, there should be no need for such a program. Every regional project should compete for funding, on its merits, with every government department and every other project in the state as part of the budget process.

Projects that don’t pass this competitive assessment shouldn't get funding.

The McGowan government, however, has announced that it will ‘repurpose’ Royalties for Regions, indicating that the program will continue but with an emphasis on projects different to those that were funded in the past.

While it must be a tempting source of funds for pet projects, the program is a luxury the government cannot afford in the current economic environment. It should either close the program or redefine it so that it picks up the recurrent expenditure in the regions that would otherwise be funded from general revenue.

Both options would have the same effect, but the second has a very thin sugar coating and keeps the concept alive.

Like the Barnett government’s Future Fund, which Mark McGowan aptly ridiculed as being funded by the government’s credit card, Royalties for Regions is the type of program that can only be justified when the government is running a surplus.

The treasurer, Ben Wyatt, is setting the scene for cuts to government spending. Everyone will be telling him that this is the time to go as hard as he can, in the budget that is the furthest from the next election and at a time when the need for harsh measures can be attributed to his predecessors.

If he baulks at this opportunity, the next three budgets will be very painful.

There will be enough pain as it is. The generous wages and salaries that unions fought so hard to achieve in the Barnett government are a large part of state government expenditure and the treasurer has indicated that these costs will be subject to review.

If Mr Wyatt doesn't address the $1 billion flowing annually into Royalties for Regions, he will not have any credibility with the public sector unions when he tries to trim employment expenditure.

• Simon Withers is a former investment banker

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