Daniel Mercer: Iron ore cash, GST turbo-charges WA’s financial revial

When Ben Wyatt gets to his feet in the chamber of the Lower House of State Parliament today to deliver his third Budget, he will struggle to suppress the urge to be smug.

Improbably, the WA Treasurer will announce the State has achieved an operating surplus for the financial year ending on June 30.

The achievement will be a full two years ahead of schedule, and five years since the last surplus was managed by the Barnett government at the fag end of WA’s mining boom.

It will also be a world away from the picture of red ink and financial doom and gloom painted by Mark McGowan not long after he took office in 2017, when the Premier described the State’s fiscal position as the “worst since the Great Depression”.

To be sure, at the time WA’s deficit was more than $3 billion, while the State’s debt was projected to top $40 billion by the end of the decade.

For a state that had been showered in an extraordinary windfall from the dividend of a once-in-a-lifetime expansion of its resources industry, they were remarkably grim numbers.

They were also an opportunity the incoming Government didn’t miss as it sought to recast the narrative around financial management and the public’s expectations about what the State could reasonably deliver.

Colin Barnett had blown the Budget by indulging in a reckless orgy of spending, the argument went, and a new period of restraint would be needed to restore WA’s fiscal stability.

Having pressed the reset button, Wyatt and McGowan would scarcely have dared believe they could be presenting a surplus so soon into their term.

But present a surplus they will, and for that the two men can thank both circumstances and their own handiwork.

Undoubtedly, one of the biggest reasons for the turnaround has been the dramatic rise in the iron ore price as supply problems out of the world’s biggest provider — Brazil — have reduced the availability of the commodity in key markets led by China.

As of Tuesday, the benchmark iron ore price was trading at $US94.17 a tonne, compared with an assumed price for the current financial year of $US61.9.

Given that every $US1 movement in the iron ore price represents a $76 million improvement or hit to the Budget averaged across a year, the upside to the recent surge is huge.

ANZ bank estimated back in February that Wyatt could collect up to an extra $1 billion if the iron ore price stayed above $US90 a tonne for the rest of the financial year.

Well, that is effectively what has happened.

On top of this good fortune, Messrs Wyatt and McGowan have also benefited from a hard-fought victory in WA’s quest for a fairer share of its GST receipts.

While much of the credit for this victory goes to Barnett, who doggedly pursued the inequities of a system that allowed WA’s GST returns to fall to as little as 30¢ in the dollar, it was McGowan and Wyatt who sealed it.

Thanks to changes legislated by Prime Minister Scott Morrison, WA will get an extra $7 billion of GST money over seven years, including $2 billion by 2021-22.

Those two boosts to the revenue ledger alone might have got the Government back into the black.

But as Energy Minister Bill Johnston observed on his way into Parliament recently, it’s not what happens outside your control that matters so much as what you can control.

And it is on this point that the Government has chalked up perhaps its biggest fiscal achievement in 26 months since winning power.

Over the span of that time, Wyatt has maintained expense growth at an average of about two per cent — a far cry from the previous decade when spending increased at a whopping average rate of 7.3 per cent.

A subdued economy may have helped put a lid on expenses as sluggish population growth took the pressure off the Government to expand services and provide new infrastructure.

Spending money is always easier than saving it, though, and to this end the Government has been notably disciplined.

Much of the hard work has been done by the Treasurer’s hard-line wages policy, which limits pay rises for the public sector to $1000 a worker.

After staring down unions including the police, who put up the stiffest fight, the Government was able to claim an early win in its war on spending.

With a host of public sector pay deals coming up for renewal in the coming two years, the Premier and Treasurer will not be given such an easy ride next time around.

Notwithstanding such challenges, an unheralded aspect of the Government’s Budget success to date is believed to come from an unlikely source.

Reportedly driving Labor’s fiscal resolve is none other than McGowan himself.

Typically it is the Treasurer who has to play the bad guy at expenditure review committee — a sub-group of Cabinet that vets all major spending decisions by Government.

Leaders from Geoff Gallop to Barnett, on the other hand, were just as liable to cave into spending requests to spare a minister embarrassment or gain an electoral advantage.

But Ministers and senior party figures say it is the Premier cracking the whip, strictly enforcing a policy that stipulates no new spending unless it is for an election promise or has been offset by reductions elsewhere in a portfolio.

It is the kind of financial discipline more prudent operators in Barnett’s government could have only dreamed of and suggests the Premier is on a mission to prove Labor deserves to be seen as a superior economic manager than the Liberal Party, at least at a state level.

As Nick Butterly opined last week, it hardly hurts Labor’s cause that Wyatt and McGowan should hand down a surplus in the middle of a Federal election campaign in which economic stewardship is central.

Perhaps most tellingly, McGowan’s discipline suggests a remorseless focus on re-election in 2021 that will allow no unnecessary risks to diminish his chances.

For a chronically weak Opposition who’s Leader, a decent man who appears defeated by politics, that can only spell four more years in the wilderness and a whole lot of trouble.