WA budget: State is a different world in fact as well as perception

For many Australians in the eastern states, Western Australia has always seemed like a different world.

Now that the welcoming sign to the state has been altered to read “you cannot enter WA unless you are an exempt traveller. Entry into WA may be subject to terms and conditions, including a requirement to quarantine for 14 days,” it is, in effect, a different world.

And here’s another way in which WA is dancing to its own beat: the state Treasurer on Thursday delivered a substantial budget surplus.

Yes, that’s right: the WA budget is well and truly in the black while the federal budget is floating in an ocean of red ink.

The surplus for this financial year announced in the state budget is in addition to the surplus recorded last financial year, having raked in close to an extra $1bn in royalties because of the high iron ore price.

The estimated budget surplus for 2020-21 is $1.2bn, followed by surpluses in the subsequent three years.

Certainly, state government spending has gone up in response to COVID-19, but the budget’s surplus was maintained, in part, because so much of the tab for the response — think JobKeeper, JobSeeker — was being picked up by the federal government. It’s a pretty good deal for Sandgropers: snap the borders shut and get the federal government to pick up the associated costs.

The WA budget is close to being a bet on the iron ore price. And when the iron ore price soars, as it has been, source revenue surges while spending can become more generous.

In the first two months of the financial year, the price of iron ore moved from about $US100 to above $US120. It is estimated that for every increase in the iron ore price by $1, the WA government receives $85m in additional royalties.

In the past, the GST redistribution formula meant that gains in mining royalties were effectively redistributed to the other states over several years but as a result of the renegotiated GST deal, this redistribution is more limited and WA gets a bigger share of the GST pie than previously.

WA is the state least worried about the decline in GST receipts that were revised down by more than $21bn between 2020-21 and 2023-24 in the federal budget. GST revenue is only 11 per cent of general government revenue in WA.

Royalty income is close to one-quarter.

The WA economy has been performing reasonably well beyond mining. On the latest figures, the unemployment rate was 7 per cent, above NSW and Tasmania, but its employment and participation rates were the highest of all the states.

Net government debt in WA is expected to rise over the next four years, funding a number of city-based and regional infrastructure projects. Even so, public sector net debt rises from around 11.3 per cent of gross state product to 14.1 per cent in 2023-24, a highly manageable increase.

As long as the iron ore price remains elevated, the fiscal position of WA should remain robust. Goodies such as the $600 Household Electricity Credit are both affordable and politically popular. However, the state government might want to play its role as part of Australia to a much greater degree than it has this year.