The McGowan Government’s fifth budget, to be delivered on Thursday, will mark a sharp break from its first four budgets. With a new Treasurer in the chair, who also just happens to be the Premier, making a virtue out of necessity, Mark McGowan is likely to increase spending significantly.
Seeking to manage expectations, the Treasurer and his Government have been clear in their messaging since they were seismically returned to office in March - there is no new spending, only for those projects or initiatives that were election commitments.
The starting point for the budget is February’s Pre-Election Financial Projections Statement forecasts for surpluses of $3.1 billion for the year just past and $2.2b for the budget year. But, given the price of iron ore, everyone believes that even those extraordinary figures will be exceeded. The resulting pressure for more spending is immense.
Not that the Government will go the full Barnett. After all, that Government indulged voters with total spending growth of 25 per cent in its first two years. Encouraged by iron ore royalties, the demands of the WA Nationals, the then Premier’s personality and blind faith in the prospect of a GST deal (which didn’t emerge until the next Government) they continued their spending spree until the mining construction boom collapsed.
The ALP McGowan Government regularly forecast aggressive spending restraint and delivered slightly less impressive, but still excellent results. The 2017 budget projected annual average expense growth of 1.9 per cent over the following four years. The next budget reduced that annual forecast to 1.2 per cent and in 2019 the forecast for spending growth was 1.3 per cent per year. Except for 2017/18 when the target was achieved, delivery was not so easy with the outcomes in the following two years being 2.5 and 5 per cent respectively. The pandemic year and Pre-Election budget forecast was 8 per cent (the actual outcome will be revealed on budget day) but the Treasurer (and Premier) will rightly claim exceptional circumstances.
The Government was helped by the community’s experience of five years of domestic economic recession linked, at least politically, to poor financial management by the previous Government and by an economic environment of low inflation and low wage growth.
In the wake of the pandemic, debt and deficit have lost their political potency and the Government will have to manage the politics of a massive operating surplus. The ambitions of all stakeholders (including internal stakeholders) will be inflamed by a record surplus. Explanations that the surplus is required to fund the infrastructure program or reduce debt, while correct, will not cut the political mustard.
The Government can manipulate the size of the surplus for the last financial year by deferring dividends from Government Trading Enterprises and bringing forward expenditure. Whether or not that has happened might depend on whether such manoeuvres were able to bring the headline surplus below a figure thought to be politically critical – for example $4b or $5b. Transferring some of the surplus to a future year may not be a concern if much lower prices for iron ore are assumed in the future.
The Government might also notionally allocate the surplus to an attractive piece of infrastructure – for example the new maternity hospital or the Ellenbrook railway line as part of METRONET, the Government’s signature infrastructure project.
Whatever it does, the Government needs to show that its fiscal strength is being used to meet community needs.
Nowhere is the spending switch more politically pressing than in the health portfolio. The 2019 budget papers reported that spending growth in health had averaged 10 per cent per annum in the decade to 2014/15. Actual growth in health spending was cut to 2.1 per cent in the McGowan Government’s first budget, 1.2 per cent in the following year and 3.4 per cent in 2019/20, with forecast growth of only 2.4 per cent for the last financial year. These are exceptional figures.
WA has an expensive health system compared to the rest of the country. In the last budget health was allocated $9.6b, or 29 per cent of total recurrent spending. According to the latest Productivity Commission figures, WA spends $3,362 per capita on public hospitals compared to the national average of $2,851 and employs 16.1 staff per 1,000 population compared to the Australian average of 15.5.
Nevertheless, a sustained period of cost control in health will inevitably produce media stories about appalling hospital performance that we have been seeing in recent months and the Government has already announced its $1.9b response.
A big factor in the Government’s containment of spending has been its public sector wages policy. This policy is already under serious challenge from a number of public sector unions and the surplus will only provoke them. It is hard to see the Government holding the line. Will the budget assumptions recognise this reality?
Another expenditure item to watch will be the extent of operating subsidies for public transport – forecast in the last budget to be $1.1b. Patronage shortfalls due to the pandemic’s influences on people’s transport preferences and working patterns, promised fare reductions for the outer suburbs and the big network expansions promised by METRONET must pump up this spending.
So, the Government faces a new era in budget politics.
The rhetoric of fiscal repair and expenditure restraint has lost its impact. As time passes the previous Government’s performance becomes irrelevant. Meanwhile red ink drowns the budgets of every other government in the country, and no one seems to care.
This time community needs are the political priority.
Having taken on the Treasury portfolio the buck stops with the Premier. There is no one else whose job it is to deliver any bad news. He may find that strong finances can be a double-edged sword. More can be done and in principle there is less bad news to deliver. On the other hand, when rivers of gold are flowing into the budget those whose demands are rejected may be much more hostile than they might have been in the Government’s first term.