The importance of iron ore to WA’s state government and the economy more broadly was starkly highlighted in the 2019-20 (FY20) state budget.
The unexpected spike in the price of WA’s biggest export accounted for almost $800 million of the $1.2 billion improvement in the budget’s bottom line since the mid-year update (MYU) in December.
The low and stable Australian dollar has also played its part, because the budget is sensitive to the tune of $101 million a year for every 1US cent change in the Australian dollar’s exchange rate for the US dollar. And that’s on top of an $81 million per annum sensitivity to each $1US a tonne change in the spot iron ore price.
Figure 1. The iron ore price chart shows US dollar denominated prices in years ending June from 1970 until 2023, the last four of which are the assumed price that underpins the state budget. Negotiated prices were generally flat at between $US10 and $US40 a tonne until around 2005, when they jumped sharply. They rose to more than $US150 a tonne in 2011, but by 2015, by which time the old negotiated price framework had given way to spot pricing, it fell back to $US55 a tonne. It then recovered to around $US70 a tonne. The budget assumes it will average $US73 a tonne in FY20, then drop back to $US66 in FY21, then to $US64 in the final two years of the budget’s forecasting horizon.
The budget prudently does not assume the iron ore price will stay at recent highs as and when iron ore exports from Brazil recover from a slump caused by supply disruptions in the wake of the tailings dam disaster earlier this year.
As the iron ore price drops back in FY21, iron ore royalties are projected to fall from $5.4 billion in FY20, to $4.8 billion in FY22. That’s still a big figure, and thanks to the hardly-won 70 cents in the dollar GST floor, not so much of it will be lost to other states from now on.
Top-up payments from Canberra over the four years to FY22 are projected to total just shy of $5 billion, then in FY23 the transition will be complete, by which time GST receipts to WA are projected to be $5.5 billion in that year alone. What a far cry from the middle of the decade, when WA’s share of the national GST pie fell as low as 37.6 cents in the dollar even after partial top-ups to prevent the share falling to the 30 cents it would have under the old distribution system.
The budget includes new road funding of $1.3 billion over the course of the four years to FY23, although only $260 million of it is in FY20. Nevertheless, a total of $1.3 billion will be spent on road infrastructure in FY20 as major work announced in previous budgets progresses.
And the road spending in FY20 is by no means confined to the Perth metropolitan area and its surrounds - the regions get plenty of work too. Moreover, no single project grabs the lion’s share of the work, so it is well spread geographically. The biggest individual spend is $83 million for the last stage of NorthLink WA, closely followed by $81 million for the Armadale Rd flyover over North Lake Rd. The only other project worth more than $50 million is METRONET related road projects worth $60 million.
No new METRONET funding was announced in the budget, but the government is progressing the business case for the Morley-Ellenbrook Line with Infrastructure Australia. Moreover, some of the roadworks relating to METRONET include “initial accommodation works for construction of the METRONET Morley-Ellenbrook Line”.
A total of $965 million of METRONET spending is earmarked for FY20, including another $315 million for the already under construction airport line, $159 million for the Thornlie-Cockburn link and $150 million for the Yanchep extension to the Joondalup line. Only $95 million of METRONET funding in FY20 is from the Commonwealth, but it ramps ups to $268 million in FY21, then $567 million in FY22, and finally $290 million in FY23.
Increases in household tariffs, fees and charges, including electricity, are limited to 2 per cent in total, which should leave more for households to spend on other goods and services. Which is important to the retail sector, which has been struggling since the end of the construction phase of the resources boom, when thousands of highly paid construction workers left WA, taking their spending with them.
Very low population growth in recent years has also constrained household consumption, but it is steadily accelerating after hitting a historical low of 0.7 per cent in FY17. Nevertheless, even in the final year of the budget’s four-year forecasting horizon, WA’s population is projected to be growing at less than the average of the 25-years to FY18.
Figure 2. The population growth chart shows years ending June population growth from 1975 until 2023, the last four years of which are the assumed growth rates underpinning the state budget. The chart shows peaks of around 3 per cent in the mid and again in the late 1980s, a trough of 1.1 per cent in 2003, then a sharp acceleration, to a peak of 3.3 per cent in 2009. There was another peak of 2.9 per cent in 2012, but by 2017 it had slowed to its historical low of just 0.7 per cent. The budget assumes it will accelerate to 1.3 per cent in FY20, then further, to 1.7 per cent in FY23.
The budget’s measures to limit increases in household costs are to some extent at the expense of faster payment of net debt.
Total public sector (ie including government trading enterprises) net debt was $5.7 billion in FY08. Over the course of the next 10 years, net debt grew to $36.7 billion. The budget projects it to peak $39.5 billion in FY20, before falling to $37.8 billion in FY23.
Erosion of WA’s government debt remains a key priority to avoid a massive interest bill as and when global interest rates rise. There is little sign of rates rising yet, but eventually they will. And the lower is the stock of government debt when they do, the less of a burden it will be on the budget at the time.
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