Tough year ahead for government, business

A recovery in economic growth, a raft of asset sales, and improved GST distribution will help lift the state’s finances out of their current parlous position; or at least that’s the hope outlined in yesterday's state budget.

In the interim, there will be tough years ahead for both government and the private sectors.

The biggest worry for the state government is the operating deficit of $2.7 billion, meaning it will be borrowing to fund recurrent spending in addition to its existing planned capital spending program.

This will drive net debt to a forecast peak of $36.3 billion in June 2018, up from $25 billion this year.

The government plans to post large surpluses in the later years of its forward estimates, when economic growth returns to trend and the GST take recovers, in combination with asset sales, to begin to get the debt level down.

On the expenditure side, it will be putting severe downward pressure on recurrent spending growth.

Exports up, demand down

Export growth will be 10 per cent in the coming financial year as Chevron’s Gorgon LNG plant and other projects switch on, helping drive gross state product growth of 2 per cent.

GSP growth at that level is down dramatically compared with the 5.9 per cent per annum growth recorded on average for the past three years, yet it will recover to around 3.5 per cent in 2016-17.

That’s roughly in line with the national rate.

However, state final demand, which strips out exports and imports, will fall again this year on the back of reduced business investment and cautious consumer spending.

After contracting 2.2 per cent in 2014-15, SFD will fall 2.5 per cent in 2015-16 and a further 1.25 per cent in 2016-17.

Concordantly, unemployment will head northwards towards 6.25 per cent in the next year.

The ledger

Due in part to the drop in iron ore prices, money flowing into the coffers this financial year is forecast to be 13 per cent below the level anticipated in last year’s budget, wiping more than $3 billion off the budget bottom line for the coming year.

Across the forward estimates, writedowns were worth about $10 billion.

Treasurer Mike Nahan said it was the most substantial reduction on record.

“That is proportionally a bigger hit to our budget than the GFC was to the Commonwealth budget,” he said.

To compensate, the government has turned to land tax.

The charge on unimproved land, which is viewed by economists as one of the least damaging to long-term economic performance, will go up dramatically.

A new scale of thresholds will mean $184 million of extra revenue in 2015-16 and $826 million across the forward years, although Dr Nahan said the rates were competitive with other states.

A landowner could expect to pay $1,750 for unimproved land worth $1 million, while for land at half that value will attract a $500 fee.

The changes won’t affect the family home, however.

Around $1 billion of savings have also been booked from the government’s capital works program, which will be achieved at lower-than-anticipated cost.

But the projects will continue as planned, with around $24.1 billion of capital spending across the forward estimates.

On recurrent expenditure, Dr Nahan said the government’s approach would be on public sector savings, not taking from households, in order not to damage confidence.

Dr Nahan pledged a decline in real spending per capita.

Slow growth of public sector wages, which make up around half of the recurrent spending bill, will do a good portion of the work, with the treasurer adding that the new wages policy for public servants had already brought results for the government.

Asset sales

A key plank of the government’s plan to reduce the stock of debt will be privatisation.

The flagship item will be a 49-year lease of the Fremantle Ports facility, which could raise $2 billion, although the government conservatively estimates the overall program could reap between $3 billion and $5 billion.

Betting agency the TAB, the State Fleet, office buildings, LandCorp holdings, the state’s softwood portfolio, and the government’s regional officer housing portfolio will additionally be on the list.

Keystart will have a portion of its loan book securitised, while electricity generation assets including renewable energy operations could also be sold.

The initial tranche of sales, announced 18 months ago and including Utah Point and the Perth Market Authority, will proceed, potentially adding a further $1 billion toward debt reduction.