West caught between financial rock and a hard place

THE WA government is in a fiscal corset after yesterday deferring tax cuts and reporting an 87pc evaporation in its budget surplus.

THE West Australian government is in a fiscal and political corset after yesterday deferring tax cuts, junking election promises and reporting an 87 per cent evaporation in its budget surplus, even though the state will see surging export and investment growth next year.

Dampening the joy about the highest reported level of West Australian business confidence in 13 years was the release of the state's mid-year financial projections, which showed an ultra-thin budget surplus of $51 million and runaway spending growth of 9 per cent.

Treasurer Troy Buswell announced $600m in "corrective measures" to shore up the state's ravaged finances, after a high Aussie dollar and weaker prices caused a sharp drop in expected mining royalties.

Loosening the bind somewhat on Colin Barnett's Liberal government was an updated forecast of 2.25 per cent economic growth in 2009-10, instead of the miserable 1.25 per cent contraction that had been predicted in the state's May budget.

Like a trampoline acrobat, the nation's most trade-dependent state has bounced straight up after a global financial crisis-induced slump.

WA is again attracting workers, deals and hyper-buzz, with local business leaders anticipating a new era of prosperity and rapid state development.

But the revival will be short-lived if the Barnett government fails to mend its boom-bust ways or repair its weakened economic balance sheet.

It must tame excessive public spending, reduce business regulation, improve its services and retain the nation's most favourable business-tax regime.

Mr Buswell fears local complacency as much as he worries about public spending. He calls the curse "Gorgonitis" and says it will be a signal challenge in the next 12 months for the government and business.

Chevron's three-decade $43 billion Gorgon project on Barrow Island - the largest venture in the nation's history - is expected to have 10,000 construction jobs at its peak, with the first liquefied natural gas produced in 2014.

Still, so early in the recovery, there are fears of a skills shortage, exorbitant housing costs and clogged infrastructure - both social and economic.

According to the Commonwealth Bank-CCI expectations survey for the December quarter, there's been an impressive rebound in measured confidence.

Investment and employment are forecast to improve, although severe labour shortages are also hovering on the employers' horizon.

"We're seeing a sharp turnaround in business and consumer confidence in Western Australia," CCI chief economist John Nicolaou said.

"The state's economy has matured over the course of the decade. We now produce a broader variety of commodities, at a world-class standard, and a range of other industries provides a buffer when the mining sector weakens."

Early on, the state's firms were preparing for the worst. The headline jobless rate rose from a pre-crisis 2.3 per cent to 5.7 per cent in July - a recession in anyone's terms.

But because this is the West, there is also a strange duality: policymakers are wary of another unsustainable growth spurt as well as the lucky prospectors' folly of slackening off.

"Gorgonitis is thinking that we don't have to worry about anything, now that we've signed off on the $43bn Gorgon project," Mr Buswell said.

"It is incorrect to think that the economy will now just take care of itself and that this will be a massive growth engine that single-handedly pulls the economy forward."

The Treasurer wants to "de-boom" his state, so that growth is sustained and is spread across all sectors through improved infrastructure, better land release and less red tape for business.

A more pressing problem for Mr Buswell is the state's budget, given he has conceded the "years of multi-billion-dollar surpluses in WA are gone".

The immediate task is to cut government spending, which rose by 13.5 per cent last year and is forecast to rise by 9 per cent in the current year.

"We are very concerned that the current levels of government spending are unsustainable," CCI's Mr Nicolaou said.

As well, he senses the return of significant labour shortages, given there is very little spare capacity and the state will need an extra 400,000 workers by 2017 on his projections.