Wages a target as state grapples with worsening debt

A wage freeze could be on the agenda for public sector staff in the upcoming state budget, according to Treasurer Ben Wyatt, as Treasury officials warn the state will need to pay increasing rates of interest on government bonds.

In a media briefing today, it was revealed the budget position had continued to worsen since the pre-election financial projections statement in February, with revenue down $1.2 billion due to lower land valuations and a slower-than-expected improvement in GST share.

On top of the $735 million GST reduction flagged in the most recent Commonwealth Grants Commission distribution, $199 million would be expected to fall away thanks to the state’s lower population growth, while land tax collections were expected to drop $239 million.

Net debt is now expected to peak at $42.3 billion, slightly higher than the $41.1 billion figured projected in the February numbers.

Mr Wyatt said the new government would need to find spending cuts in addition to those already reflected in the forward estimates, with no new spending proposals, outside of election commitments, to be allowed into the next state budget.

Despite teachers and police officers both being up for wage negotiations, Mr Wyatt said he wouldn’t rule out a wages freeze in the public sector.

“When 40 per cent of general government spending is on salaries, it would be foolish to quarantine that from consideration, and it is being considered,” he said.

“I’m looking at the cost of salaries and wages, on particularly policy initiatives; they’ll come at budget time.”

The current policy of capping increases at 1.5 per cent was generous, he said.

“We have in Perth very low inflation,” Mr Wyatt said.

“One and a half per cent is a real wage rise, it’s not dramatic, I accept that.”

He said public sector wage growth lagged that of the private sector, with the latest wages data in Western Australia showing a 1.8 per cent increase in the past 12 months in the public sector compared to 1.2 per cent in the private sector.

Electricity prices would also rise, possibly by more than the 7 per cent previously flagged after the government took office.

Mr Wyatt also would not rule out any further asset sales, including of the state's electricity generator, Synergy.

Debt dilemma

Under-treasurer Michael Barnes said the state government would need to borrow about $13 billion on financial markets in the financial year ahead, with around $8 billion of that due to existing debt maturing.

Around $5 billion would be to fund the state’s ongoing cash deficit.

Mr Barnes said the environment for borrowing was becoming more difficult, with banks now meeting regulatory requirements for safe state government bonds.

That mean an increasing amount would need to be borrowed offshore, up from about 20 per cent of gross debt at the moment, possibly to levels similar to the Commonwealth government at about 60 per cent.

Asian investors had some preconceived concerns about the state’s economy, Mr Barnes said, and it was becoming increasingly difficult to find bond buyers.

That, and a continued risk of a further credit downgrade, meant that the spread on interest rates between state government bonds and federal bonds would continue to grow, he said.

A difference of around 60 basis points was already the highest in the nation, Mr Barnes said, compared with 45 basis points for Queensland.

Even without an increase in risk premia, the interest bill on government debt will double to be around $1.2 billion per annum by 2020, according to Treasury forecasts.

There was a great deal of vulnerability in the finances too, Mr Barnes said, with the state potentially exposed to negative economic shocks.

The iron ore price forecast, for example, was way above the level suggested in financial markets, more than $US15 higher in 2020 at around $US63.70.

Surprise

Premier Mark McGowan expressed surprise at the state of the books, saying he was losing sleep over it.
 

“In opposition you never quite understand the magnitude of what will confront you,” Mr McGowan said.

He was scathing in criticism of the previous government’s budget management, saying the finances were in the worst state since the Great Depression, and that seeing the numbers had been a dramatic wake-up call.

One issue had been the Nationals, Mr McGowan said, which had been allowed to have its own shadow budget process through the Department of Regional Development for Royalties for Regions spending.

Another had been that the expenditure review committee had generally been abandoned, with spending initiatives going straight to cabinet.