Western Australian Economy:
Where Did All The Money Go?
A critique of the Liberal National Government’s
Economic Management.
Dr Tony Buti MLA Member for Armadale
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WESTERN AUSTRALIAN ECONOMY: WHERE DID ALL THE MONEY GO?
A critique of the Liberal National Government’s economic management
Dr Tony Buti MLA
It was inevitable that one of the greatest mining booms this state has ever seen would end. A
competent state government would have foreseen that and prepared for such a situation. But,
the Liberal National state government must have thought the golden years would last forever.
And so, when the predictable end arrived, they had not planned for it. Now it wants the people
to shoulder the load of the $4 billion dollar budget deficit with which, in its incompetence, it
has burdened them.
The West Australian Senator and Federal Minister for Employment, the Hon Michaelia Cash
recently asserted that, “the Western Australian economy is a transitioning economy. We have
gone from that intensive investment in the mining construction phase and we are easing into a
diversified economy and you see more jobs created in the retail and services sectors.”
But, we are not seeing more jobs created overall. On the contrary, Dr Andrew Charlton, former
economics advisor to Prime Minister Kevin Rudd, recently told the ABC, “Western Australia
is going backwards very significantly and has conditions that you would describe at a state
level as being consistent with a deep recession.” A seasonally adjusted unemployment rate of
6.3% paints a broad picture of the inevitable human cost of that deep recession. Too often
though, the personal human costs are hidden.
No one can explain away this decline by describing the West Australian economy as
“transitioning,” as Senator Cash tried to do. A transition from one economic “phase” to another
phase does not happen without there being an agent of change. And, the agent of change must
have a plan. The Liberal National State Government did not and does not have one. Without a
plan, we do not have transition; we have collapse.
Without developing a plan, the state government squandered a decade of rising commodity
prices, fuelled by strong resources demand from Asia. When it should have been planning, it
misspent the wealth that twenty-four quarters of unprecedented economic growth gifted it. It
sat on its hands, complacent, as it watched employment, business investment and population
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grow, never to end, or so it thought. When it did end, the government realised in dismay, that
6.3% of its workforce had no job.
What is more, when one describes the money we owe as government debt; it conceals the fact
that economic prudence is not an end in itself. Economic prudence is a means to an end. It
means having money, which good government needs to create a just and stable community in
which every person can reach their full potential. That is the end to which the Labor Party
aspires. In contrast, the Liberal National State Government has been on an imprudent spending
spree.
It might want to talk about its commitment to infrastructure since it came to office in 2008 and
yes it has completed some important new constructions. But, infrastructure is not defined just
by the physical presence of the structure. It includes too the facilities and systems that ensure
efficient functioning. The litany of structural and operational problems that have plagued the
new Perth Children’s Hospital and the Fiona Stanley Hospital are testament to complacency,
which has led to delays and budget overruns. Combine this with a plethora of broken promises
and backtracked election commitments and it is little wonder that the electorate has lost
confidence in its government.
As previously noted the WA economy is not “transitioning”; rather our state economy is free
falling. Moreover, we are not “easing into a diversified economy” where job creation in the
retail and service sectors will replace those of the mining construction boom. Job creation in
these sectors very much depends upon enduring employment in the traditional pillars of the
West Australian economy – mining and housing construction, which stimulates consumer
demand for goods and services. To diversify the economy, there needs to be a plan to do so;
this government does not have such a plan.
The escalating human costs of this avoidable disaster are increasingly evident, in employment,
wages and income, and housing. This includes new home construction, homeowner lending,
and owner occupied approvals (as opposed to investment lending). These are the sectors that
show the very human face of any downturn, and these same indicators; already at the lowest
levels on record, continue to fall.
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Here are some facts that bear out how the government has failed.
Employment
In July 2016, WA's seasonally adjusted jobless rate rose to 6.3%, the second highest
among all States and Territories (refer to Figure 1).
Figure 1: Unemployment Rate Western Australia and Australia
Source: ABS Labour Force, Western Australia, July 2016, Catalogue No: 6202.0
The number of full-time jobs in the state has now fallen for 19 consecutive months.
At the end of the March 2016 quarter 12.4% of West Australians were working less than the
hours they wanted or needed (refer to Figure 2). This is more than double the rate of 5.6% a
decade previously.
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Figure 2: Western Australia Underemployment Ratio 2006 - 2016
14.0
12.4
12.0
10.0
8.0
6.0
5.6
4.0
2.0
Mar-2016
Oct-2015
May-2015
Dec-2014
Jul-2014
Feb-2014
Sep-2013
Apr-2013
Nov-2012
Jun-2012
Jan-2012
Aug-2011
Mar-2011
Oct-2010
May-2010
Dec-2009
Jul-2009
Feb-2009
Sep-2008
Apr-2008
Nov-2007
Jun-2007
Jan-2007
Aug-2006
0.0
Source: Source: ABS Labour Force, Western Australia, July 2016, Catalogue No: 6202.0,
Wages, income, and earnings
As one would expect, deteriorating employment leads to slowing wages growth (for
example at a rate below inflation). At its worst, wages fall. In Western Australia, wages have
been falling overall since 2014, as shown in Figure 3.
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Figure 3: Wage Changes
Source: ABS Wage Price Index, Western Australia, June 2016, Catalogue No: 6345.0
Construction (including housing)
On the 24th of August, the Australian Bureau of Statistics (ABS) released national and
state data on the value of construction work done for the June quarter of 2016. Across Australia,
there was a seasonally-adjusted 3.7% fall in total construction activity over the quarter (refer
to Figure 4). But look at what is driving this national decline. In that same quarter, Western
Australia suffered a huge $2.3 billion (23%) drop in total industry and home construction
activity. It will get worse, with the winding up of the two largest resource projects – Gorgon
and Wheatstone LNG.
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Figure 4: States and Territories Value of All Construction Work Done
Source: ABS Value of Construction Work Done, Western Australia, June 2016, Catalogue No:
8755.0
Housing construction has fallen, and continues to fall, sharply. The number of new home
approvals in June 2016 were 32% lower than June 2015. More alarming, first homeowner
grant applications, already at their lowest levels in a decade, were 54% lower in June 2016
(refer to Figure 5).
Figure 5: June, 2016. WA Selected Housing Finance and Construction Data
% Change Versus Same Period Last Year
First Home Owner Grant Applications
-54.5%
Source: Office of State Revenue,
Government of Western Australia
Dwelling Approvals
-32.2%
Source: 2016, June: ABS 8731.0,
Table 7, Series Number A422566L
The government’s complacency has caught it out. And, it took less than two years.
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In 2014, Western Australia’s economy performed better than any other state or territory in
Australia. According to the July 2014 CommSec State & Territory Economic Performance
Report, a quarterly report which measures economic performance through analysis of eight key
indicators, Western Australia lead the way on retail trade and housing finance and placed
second on economic growth and construction work. The state was also ranked third on business
investment, population growth, and dwelling starts.
Less than two years later, Western Australia’s economy is now the second worst performing in
Australia. Only Tasmania is doing worse (Commonwealth 2016). Our State is not only
contracting but is in a recession.
The only indicator that looks good is the gross value of WA’s iron ore exports to both the Gross
State Product (GSP) of Western Australia and that of the Gross Domestic Product (GDP) of
the nation.
But, GSP does not accurately illustrate the conditions faced by West Australians at the
coalfaces of work and housing. With the passing of the massive employment and wealth
generating stages of the mining construction boom and the return of iron ore prices to levels
closer to the long run average, In this export phase, the main beneficiaries are Australian
and international investors and the Commonwealth Government, through corporate tax,
income tax and other Commonwealth receipts, Western Australia still directly benefits
from royalties levied on the mining of our state’s natural resources, but these decrease as the
price obtained per tonne drops.
.
Thus, whilst the increasing volume of exports ensures GSP growth remains positive;
State Final Demand (a measure of all household, business and government investment and
spending within WA but excluding exports). is a better indicator of whether the livelihood of
the average West Australian is improving or worsening. As the chart in Figure 6 shows,
State Final Demand in WA since the second quarter of 2013 has gone negative.
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Figure 6: Western Australia State Final Demand
Source: ABS, Detailed Components Change Volume Measures, Western Australia, June 2016,
Catalogue No: 5206.0
It is unavoidable and in fact, irresponsible to claim that WA is anything but mired in a deep
recession, that has not yet bottomed out. It may get far worse before turning.
Of course, Western Australia is a mining state and, it would be churlish to suggest the state
government should be held responsible for the forces of supply and demand that have ended
the mining construction boom. But, it must be held responsible for incompetence, bordering
on negligence, for failing to acknowledge a boom built upon fixed asset construction has a
beginning and an end; and for failing to plan for it.
It has failed to produce prudent forecasts of Chinese demand for ore. It has not considered
adequately the key determinants of demand. These include the level and growth rate of China’s
urbanisation, projected make up and growth of GDP, the ratio of services to construction and
manufacturing. A responsible administration would have done so, and planned cautiously.
The state government has the full resources of the West Australian Treasury at its disposal to
help it with planning. Yet, it has either failed to acknowledge, or not understood, the risks
associated with pinning the state’s future on a single commodity exported to a single market.
Also, the Liberal National government has failed to acknowledge that at stake was the welfare
of its 2.6 million citizens.
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Figures 7 and 8 below show that, as late as the 2014/15 State Budget, this government was
predicating an iron ore price per tonne of $122.70. It predicted only marginal falls, with the
price settling in the forward estimates to 2017-18. Based on this illusion, royalty income would
continue to grow, and the party would go on and on.
Reality dawned just six months later when the same government released the Mid-Year
Financial Projections Statements. This revealed a $1.6 billion downgrade in budget revenues
in 2014-15, and an unprecedented $5 billion downgrade over the forward estimates period
(2014-15 to 2017-18).
Figure 7: WA State Budget 2014-15: Key Budget Assumptions
Source: May 2014, WA State Government Annual Budget Paper 3
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Figure 8: Estimated Royalty Income
Source: May 2014, WA State Government Annual Budget Paper 3
Overall, these data show that the state government has failed to prepare Western Australia
adequately for the challenges of life after the boom. But, this negligence in not planning for
even the slightest ‘downturn’ is just part of this travesty of economic judgment.
Even more astounding has been the government’s complete failure to manage its own finances.
Either so entirely deluded, or completely incapable of asking itself “what if”, there was never
any chance of drafting a Plan B to constrain runaway spending if and only if the worst case
scenario became reality. After all, no-one likes a party pooper.
The Barnett Government’s unsustainable spending has brought net state debt to an estimated
$33.8 billion this financial year. Or put in terms more meaningful to all West Australians at the
coalface, a debt of $13,000 for every man, women and child in this state. But this travesty does
not end at $33.8 billion. By 2018-19—only 24 months away—net debt will have risen to $40
billion.
The state government refuses to own up to its incompetent economic management and poor
long-term planning. Instead, it tries to shift the blame to Western Australia’s reduced share of
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GST and falling commodity prices for the state’s appalling financial position. Treasurer Mike
Nahan tried to explain this year’s depressing state budget with a disingenuous comment
reported in WAToday. “I'm not blaming anyone, but our source of revenue across the board,
including a drop in GST and iron ore has seen revenue drop by 22%. Tell me how would you
deal with that?” The answer to that, surely, must be that a competent government does not wait
until the inevitable happens before it addresses the problem. You plan for it. You adjust your
spending commitments. A Treasurer who holds a PhD in Economics ought to understand that
simple economic reality.
Dr Nahan is correct in noting that revenue has declined significantly. It’s not nice when the
music stops and you’re the one with nowhere to sit. The fall was steep, coming down from the
dizzying heights less than two years earlier, when our revenue per capita was close to 1/5 higher
than any other state (see Figure 9). But, the question the Treasurer should have been asking is
not, how do you deal with that? The real question, which he should have asked himself is, “why
did I not listen to the voices of reason, which were saying that this may not last forever; it’s too
good to be true?”
Figure 9: State Government Revenues Per Capita
$000 per capita, 2014-15 budget
Source: Analysis of State Budget Papers for 2014-15;
Note: Tied grants are those that are ‘tied’ to a particular purpose
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Dr Nahan’s comments are indicative of the Liberal National Government’s approach to cyclical
and structural challenges in government. React; do not plan. Rather than prepare for the
inevitable end to the mining boom, Dr Nahan’s rhetorical question “Tell me how would you
deal with that?” highlights the government’s failure to equip the state with savings initiatives
and diversified industries to absorb the economic shocks of reduced demand for lower-priced
resources.
In the State Parliament, Shadow Treasurer Ben Wyatt gave Dr Nahan’s rhetorical question, the
treatment it deserved. “The Liberal Party has delivered us into this financial mess, not the
federal government, not the Commonwealth Grants Commission, not America, not China; it
has been the Liberal government” (Hansard 16 June, 2016). Mr Wyatt followed with this
damming indictment of state government profligacy. The state government, he said, was guilty
of “operating on the assumption that the commodity prices were going to stick around at record
high levels for a lot longer than anybody thought” (Hansard 16 June, 2016).
By failing to adopt a responsible, slow and steady increase in expenditure during the good
times, the state government has amassed $33.8 billion of net debt. How? By increasing its
borrowings to fund infrastructure and services needed, it says, for an expanding population.
That recklessness has cost Western Australia its AAA credit rating from ratings agency
Standard and Poor’s. There is truth in the argument that increasing population generates a need
for increased infrastructure. Western Australia’s population increased 1.3% (33,200 people)
between 2014 and 2015. But, the state’s population increase has now slowed dramatically. In
2015-16, it grew just 1.1% compared with 1.8% nationally.
There is no question that an expanding population does require substantial investment in areas
such as transport, health, and education to ensure these services can function effectively. But
some infrastructure projects of this government do have to be questioned.
The construction of Elizabeth Quay and Perth Stadium are just two examples of excessive
government spending on projects that do not directly serve the needs of an expanding
population. These projects have created short-term work opportunities for people in the
building and construction industry. But, to what end for an increasing population? The fact is
that the government has spent $441 million on Elizabeth Quay and $918 million on the Perth
Stadium merely to “transform the city.” Yes, Elizabeth Quay and the new stadium represent
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attractive additions to Perth’s lifestyle. But, are these grand construction projects as important
as increasing the number of hospital beds in Western Australia, reducing congestion on busy
roads, or, lo and behold, reducing the state’s debt?
The Liberal Party in opposition made a $200 million commitment to transform Royal Perth
Hospital (RPH) into a 400-bed trauma facility, with a new emergency department and a new
west wing. It took this promise into its 2008 election campaign. However, in government, its
desire to “transform the city” has meant that important projects like the RPH redevelopment
have either been shelved or poorly delivered. Shadow Minister for Health and Deputy
Opposition Leader Roger Cook made this point trenchantly in the third reading of the
Appropriation (Capital 2016-17) Bill 2016. He accused the government of misleading the
public about its RPH redevelopment promise. He told Parliament that the government had
funded just $10million to fix the air conditioning and upgrade the lifts at RPH. “This is an
exercise in repair work to an ageing piece of health infrastructure that this government has
neglected following a full frontal, two-election campaign about how it was committed to a
$200 million redevelopment of Royal Perth Hospital” (Hansard 15 June, 2016).
The government’s failure to deliver on its RPH commitment was the result of poor financial
management. Cook claimed, “The government has completely destroyed the finances of this
state and has completely destroyed the credibility and reputation of this state as a state of strong
economic wellbeing” (Hansard 15 June 2016).
Because the state government has failed to manage responsibly its revenue from mining
royalties during some of the wealthiest years of Western Australia’s history, it has broken an
astounding number of promises and commitments made to the people of Western Australia.
For example, prior to the state election in 2008, the then state opposition leader Colin Barnett
promised a tax cut of $250 million for families and businesses in WA. In government, as
Premier, he has not fulfilled that commitment. This tax break would have alleviated the
financial pressure felt by many households and businesses. It would also have stimulated
business investment and household spending. In a 2010 budget announcement the government
claimed it was not in a position to deliver the full promised tax cuts, because of a “time lag
between the forecast economic growth and the recovery of the state's finances” (ABC 2010).
It has delivered only half of the promised tax cuts. But it has delivered the state’s largest budget
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deficit on record. This parlous state of affairs is not merely because of fewer mining royalties
in the last two years. It is the result of poor planning and management of expenditure across
key government portfolios.
Now, with mining royalties drying up and economic time lags inflating WA’s current GST
contribution, the government has had to search for alternative sources of revenue to fund
expensive recurrent services such as health, transport, and education. This means selling
something. It also means breaking other promises. Promises the government made before and
after both the 2008 and 2013 elections
State-owned assets like Western Power, Fremantle Port, and the TAB provide the state
government with a steady and reliable flow of income in the form of dividends and retained
earnings. Orion Consulting reports that in 2014/15, Western Power alone delivered $515
million dollars in financial benefits to the state budget (Orion 2016). But, needing to reduce
escalating debt in WA and repair mismanagement of the state’s mining boom revenue, Premier
Colin Barnett has backtracked on previous assurances that the government would not privatise
these state-owned assets.
In 2013, the Premier told radio station 6PR listeners, that his government “won’t be selling
utilities as has been speculated. So there won’t be a sale of the Water Corporation or Western
Power or Verve or the TAB.” Earlier, in the lead-up to the 2013 state election, he told
Parliament, “that if this government is re-elected, there will not be privatisation of Fremantle
Ports” (Hansard 20 June 2012). If the government had managed its finances better during the
mining boom, the Premier could have avoided the embarrassment of reneging on his nonprivatisation commitments.
Peter Tinley, the Shadow Minister for Science and Trade (among other things) summarised the
awkward position in which the state government currently finds itself: “The state now has the
worst set of books it has ever seen and the worst set of finances of any Australian jurisdiction
ever in the history of this country. We also have the highest level of gross and recurrent debt
and the deficit is running at an inordinate $3 billion-plus. That cannot be sustained by this
government and, on the current estimates, certainly cannot be repaid, at least not by the next
generation” (Hansard 16 June 2016).
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With a state election looming in March 2017, Premier Barnett once again has to react, because
he did not plan. Facing public disquiet and uncertainty, the Premier has tried to convince the
electorate that private ownership of government assets like Western Power and Fremantle Ports
would “modernise” Western Australia. It would allow “individuals, small businesses, and
communities to be entrepreneurial and innovative” (Hansard 16 February 2016). But the truth
was exposed in 2015 when the Premier told Parliament “The government has also begun a
measured program of asset and land sales to help keep debt at manageable levels” (Hansard 17
February, 2015).
The government can spruik its asset sales programme, but the people of Western Australia
know it is yet again just reacting to worsening debt caused by poor financial management. As
the state government’s debt rises, so too does the cost of living. Yet, before the 2013 state
election the Premier promised that electricity prices would be kept at or around the 2.75% rate
of inflation. Four months after being re-elected, the government increased electricity prices by
4%. React; do not plan!
In its 2014/15 budget, the state government said that increases in utility charges, including a
6% increase in the price of water, 4% increase in public transport fares, and 3% increase in
drivers licence fees, were necessary to ensure “utility prices better reflect the cost of service
provision.” In other words, the government’s misuse of mining revenue meant that West
Australians now have to pay more for essential services to fund the Premier’s “infrastructure
legacy.” Just another consequence of its react, do not plan mindset. In the meantime,
households and small businesses struggle to keep up. And unemployment continues to rise.
In November 2013, Western Australia’s unemployment rate was 4.2%. It has now risen to
6.3%. Such a substantial jump in the number of people without a job in Western Australia can
largely be attributed to the state government’s failure to diversify the economy and create jobs
outside the mining industry. Bernard Salt, a columnist for The Australian, offered a fair
assessment of the current employment challenge in Western Australia following the end of the
mining boom. “When the cycle turns down in one industry such as mining, there is insufficient
scale in other sectors to cushion the fall” (Salt 2016).
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As if finally waking up to reality, the Premier told the Parliament at the start of 2016,
“Increasingly, more of our economic growth will come from sectors other than mining, such
as agriculture, tourism, education and health services, and science and innovation” (Hansard
16 February, 2016). However, the agriculture, forestry and fishing industry represents just 2%
of Western Australia’s total employment (Government of Western Australia, Department of
State Development 2016). Earlier this year, Paul Papalia, Shadow Minister for Tourism
warned of the employment challenges presented by the agriculture industry. He questioned
whether the government had done enough to expand it: “Agriculture is a sector that is
increasingly automated. There are not many jobs created anymore. Agriculture is not a sector
that can be expanded rapidly, but even if the government was able to do that, it is increasingly
not employing large numbers of people” (Hansard 14 June, 2016).
It is not good enough for the government to expect agriculture to fill the revenue void left by
falling commodity prices. It must also be prepared to invest in other industries that will both
raise revenue and create employment opportunities. For example, tourism has that potential to
increase Western Australia’s wealth.
At the moment, tourism employs 97,200 people in Western Australia and pumps $13.4 billion
into the local economy. The State Government Strategy for Tourism 2020 is to double the value
of tourism in WA from $6 billion in 2010 to $12 billion in 2020. To reach this goal, the
government must allocate more funding to promote Western Australia as an attractive
destination for tourists from Australia and from overseas. Tourism Council chief executive
Evan Hall echoed this sentiment in an article in The West Australian. “…it’s important that
government invests in tourism promotion and infrastructure. If we don’t invest in promoting
WA as a visitor destination then the tourism industry will not be able to create the jobs WA
needs” (Acott).
But again, the state government does not seem able to plan. The government spent only $74
million on destination marketing and events funding in 2015, while Queensland spent $112
million, New South Wales spent $176 million and Victoria spent $185 million. (Hansard 14
June, 2016). If the government is serious about promoting Western Australia as an attractive
tourist destination, then it must spend more money on destination promotion. Tourists will not
discover Western Australia by happy circumstance. The government must plan to make that
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happen. Creating additional long-term employment opportunities in the tourism sector depends
on it.
The Liberal National Government has failed, not only against economic management criteria,
but also against the human values criterion that is the heart of Labor’s raison d’etre. WA Labor
has a plan. It is a blueprint for jobs to create a more robust Western Australian economy beyond
the boom and bust cycles of the mining and resource industries. Labor’s task is to continue to
communicate that plan to the people between now and March 2017. And, if WA Labor, led by
Mark McGowan, takes government after the March 2017 state poll, the Labor Government’s
responsibility is to commit to that plan, and to honour that commitment.
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References
Western Australia, Legislative Assembly 2016, Hansard Debates, 16 February, pp. 70.
Western Australia, Legislative Assembly 2016, Hansard Debates, 14 June, pp. 3438b3471a.
Western Australia, Legislative Assembly 2016, Hansard Debates, 15 June, pp. 3499a3514a.
Western Australia, Legislative Assembly 2016, Hansard Debates, 16 June, pp. 3625a3653a.
Western Australia, Legislative Assembly 2016, Hansard Debates, 20 June, pp. 5.
Foster, B 2016, “WA State Budget 2016: The biggest deficit in history,” WAtoday, 12
May. Available from: www.watoday.com.au. [6 August 2016].
ABC 2010, “Tax cuts ruled out,” ABC, 12 April. Available from: www.abc.net.au. [6
August 2016].
Salt, B 2016, “Perth after the mining boom: multicultural gateway to Asia has shed its
fastest-growing city status,” The Australian, 13 May. Available from:
www.theaustralian.com.au. [7 August 2016].
Acott, K 2016, “Tourism keeps state beating,” The West Australian, 9 August. Available
from: www.au.news.yahoo.com/thewest. [7 August 2016].
Commonwealth Research 2014, “State & territory economic performance report,”
CommSec, July. Available from: www.investing.commsec.com.au/stateofthestates. [4
August 2016].
Commonwealth Research 2016, “State & territory economic performance report,”
CommSec, July. Available from: www.investing.commsec.com.au/stateofthestates. [4
August 2016].
ORION Consulting Network 2016, “Western Power Privatisation Budget Impact
Analysis,” ORION Consulting Network, May.
Government of Western Australia, Department of State Development 2014, Western
Australia Economic Profile December, Online, Perth.
Government of Western Australia, Department of State Development 2016, Western
Australia Economic Profile July, Online, Perth.
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Printed by Dr Tony Buti MLA Member for Armadale
2898 Albany Highway, Kelmscott Western Australia 6111
Telephone: (08) 9495 4877 or text only 0474 195 312. Facsimile: (08) 9495 4866
Email: [email protected] or [email protected]
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