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WA’s newly elected government has inherited an underlying budget position which remains strong, but is expected to weaken considerably over the forward estimates.
While WA remains on track to maintain a significant budget surplus in the current financial year, this position is expected to deteriorate rapidly thereafter, with a net operating deficit forecast by 2011-12, as a result of weaker revenues and a high baseline level and growth in government expenditure. Of further concern is that this deterioration may also threaten the state’s AAA credit rating.
With the state’s budget position expected to deteriorate, CCI believes that careful financial management is needed more than ever to help guide the Western Australian economy and budget through the current challenging economic times. This theme forms the basis of CCI’s 2009-10 Pre-Budget submission.
High levels of government expenditure have come as a result of continued spending blowouts over a number of years – a trend that must change if the budget position is to improve.
Control over general government expenditure is the cornerstone of good financial management. CCI is increasingly concerned that record budget surpluses in recent times have masked a worrying trend of excessive growth in government spending.
CCI welcomes the Government’s recognition of the need to contain expenditure growth, through its commitment to impose a once-off, three per cent efficiency dividend, as well as to conduct an Economic Audit of the operational and financial performance of the WA public sector. CCI believes that these measures will go some way to stemming excessive growth in general government spending in the near term.
However, it is important that ongoing measures are adopted to ensure expenditure growth is contained. Such measures must have a primary focus on containing wages growth, and include the setting of aggregate wage growth targets for departments and agencies, and instituting an efficiency dividend on output costs of at least one per cent a year.
CCI welcomes the renewed focus of the WA Government to ensure that the public service operates effectively and is empowered to make decisions. This requires agency heads to be accountable for the actions of their agencies. CCI has suggested key initiatives that the WA Government could introduce to improve government management, including the introduction of performance agreements with agency heads; meaningful and measurable key performance indicators for them and their agencies which should be agreed and published annually; and the development of a clear strategic direction, and key performance measures, for service areas.
CCI also believes that broader public service reforms, such as the reduction in the number of departments and agencies, are also necessary to ensure that resources are directed to their most valuable use. In particular, the Government should consider options for contracting out services to the private sector, privatisation of agencies, and abolition of agencies that are no longer relevant, or do not perform a core function of government. In this regard, CCI’s submission includes examples of the scale of reform that could be effected in the WA public service.
Exerting control over expenses will also reduce pressure on the Government to find additional revenues during difficult financial times, which otherwise would further increase the burden upon taxpayers.
Taxation is the most costly and intrusive facet of the interaction between government and business. Tax probably has more effect on the profitability and day-to-day operations of most businesses than any other government activity. Getting the tax structure right is the single most constructive reform that governments can make to promote a productive economy and competitive business sector.
CCI believes that the Western Australian Government should use the 2009-10 Budget to demonstrate its commitment to providing genuine taxation relief and reform to taxpayers, and therefore improve WA’s taxation competitiveness which has suffered in recent years as a result of relatively high tax rates and fixed thresholds, pushing taxpayers into higher tax brackets.
CCI recognises that the anticipated weakening of the WA economy over the short term is likely to provide the government with little capacity to direct an adequate amount of funding towards tax cuts. However, this is not to say that some effort to provide taxation relief is not expected nor required in order to promote growth and investment in the State.
The Government’s election commitment for the provision of $250 million in tax cuts is welcomed by CCI and seen as a positive first step in what is hoped will be part of an ongoing program aimed at improving WA’s tax competitiveness.
Given the commitment to provide $250 million over four years is modest, CCI believes this would best be applied to one tax reduction measure, in order to maximise its impact. Generally speaking, WA business has not enjoyed any decrease in the overall tax burden relative to other sections of the community and as such, there is a strong case for the Government to direct the election commitment for the $250 million provision for tax cuts to the business sector. In particular, payroll tax (reducing the payroll tax rate and increasing the exemption threshold), and also addressing the recent surge in land tax assessments, are priority tax issues.
The WA Government plays a key role in the economic development of the State through the provision of high quality social and economic infrastructure and it is important that such infrastructure is provided in a fiscally responsible manner. While it is important for the Government to remain committed to maintaining a AAA-credit rating, the forecast deterioration in the state’s financial position over the forward estimates reinforces the need for the Government to be prudent in its investment decisions to ensure net debt levels do not threaten this key financial target.
There will always be numerous competing infrastructure requirements that must be prioritised and funded within a sound fiscal framework. It is for this reason that CCI has long supported the development of a medium term infrastructure plan, to provide a greater degree of certainty as to the likely future infrastructure projects that will be undertaken in the State and assist in depoliticising the prioritisation process.
In 2005, the previous State Government announced that it would be developing a State Infrastructure Strategy. While CCI welcomed this announcement, and supported the proposed framework for assessing WA’s future infrastructure needs, it was disappointing that the final report was never released. CCI believes that the current State Government could make good use of this important body of work, to assess WA’s future infrastructure requirements during this time of increasing budgetary pressures.
Not only should the Government prioritise the delivery of projects, it is equally important that consideration be given to constructing key projects in a counter-cyclical manner. Such a move will prevent a ‘crowding out’ effect, which is caused when both the public and private sectors compete for a limited amount of resources.
CCI supports the Government’s infrastructure priorities identified in its recent submission to the National Infrastructure Audit. These projects, including the Ord Stage 2 project, common use infrastructure for Oakajee Port, the Northbridge Link, the Kimberley gas hub, Pilbara housing and indigenous essential services and transport links around the Perth Airport, will all provide a considerable benefit to the state.
CCI supports the Government’s decision to prioritise key infrastructure projects to help manage the state’s finances as a result of the global financial crisis. The priority projects announced by the Government in early February (including the extension of the northern suburbs rail line to Butler, the construction of 1,000 new homes across the state, and a commitment to build a new museum in Northbridge), are valuable projects to the future development of the state.
However, while CCI understands the Government’s ability to afford a much larger capital works program has been reduced in recent months, it is important it plan for the state’s long term infrastructure needs, and resist the temptation to scrap projects that it has deemed not a priority for the immediate future.
In addition to these projects, CCI has compiled a list of key economic and social infrastructure priorities for consideration as part of the 2009-10 Budget, most of which have been detailed in previous submissions to Government.
The availability of broadband in WA’s metropolitan and regional areas is vital for state development and industry’s participation in the digital economy. CCI believes that the State Government should investigate ways to leverage its current telecommunications assets and future infrastructure projects to encourage greater competition in the industry.
CCI believes that the Government should bring forward the development of the Bunbury Outer Ring Road. This will provide access to proposed industrial areas to the east and south east of Bunbury and linkages to the Perth – Bunbury Highway, South Western Highway, Bussell Highway and the Port Access Road.
In order to improve the vibrancy of Perth and support the longer term development of the state, CCI also urges the Government to commit to the development of a vibrant and mixed used Perth Waterfront Precinct, and a new Multi-Purpose Outdoor Stadium.
While CCI’s submission focuses on prudent financial management to ensure the sustainability of the state’s finances in the context of a slowing economy, it also reinforces the importance of putting in place policies which will encourage growth and development over the longer term.
CCI has identified a range of key policy priorities which it believes are necessary to ensure an economic environment that is conducive to innovation, growth and entrepreneurialism.
Despite an improvement in the ability to source suitable workers in recent times, labour shortages still remains a critical longer term issue for WA businesses, particularly as baby boomers begin to retire and the relative size of the workforce shrinks. CCI believes that there is an important role for the State Government to ensure the WA economy has the workforce it needs.
As part of the 2008-09 Skilled Migration program, the Commonwealth Government has expanded the abilities of State and Territory Governments to sponsor skilled migrants to address skill shortages in their jurisdiction. CCI believes that the WA Government should use these newly acquired powers to develop a state based migration program, which would play a critical role in addressing the skill needs of the state and ensure that WA meets its labour requirements going forward.
The WA Government also has a role to play in terms of education and training, in particular developing programs to improve the educational attainment for certain sectors of the community, providing further education and training to older workers and the long term unemployed, and introducing greater innovation in the education system are all key strategies which the state Government can adopt to address the state’s labour shortages.
Other key reforms that the Government should focus on as part of a broad economic agenda include developing a state energy strategy to ensure a secure and reliable supply of energy, removing the state’s archaic retail trading hours restrictions, undertaking a specific program to reduce regulation and red tape, facilitating reform in the education and training, and health and community services sectors, and representing the State’s key industries in relation to climate change policies.
This long term agenda is even more important during this current period of uncertainty and the associated downturn in the economy. Governments must resist calls for further regulation and industry assistance, and should continue an economic reform agenda that is critical to sustained, long term prosperity. No other economic system has proved as capable as free enterprise in providing the economic circumstances most likely to deliver a sustained, high standard of living.