Despite remaining the economic powerhouse of the nation, the Western Australian economy begins 2008 facing a number of challenges which have the potential to limit future growth and investment.

The latest WA Economic Compass report found the state's economy continued to power ahead in the second half of 2007, buoyed by the massive investment program by WA business and high levels of consumer spending. However, while the outlook is bright, some domestic and global risks remain.
Capacity constraints such as labour shortages, higher wage pressures and a backlog of major infrastructure projects continue to restrain economic growth and business investment.

Notwithstanding the pressing capacity constraints, the WA domestic economy grew by a remarkable
12 per cent over the year to September 2007, making it easily the fastest growing state in Australia.
Importantly, such growth had been broadly based, with all sectors making valuable contributions to growth and development. The momentum that has been built across the economy in recent years has allowed the state to prosper in the face of rising domestic interest rates and global economic uncertainty.

Looking forward, the outlook is similarly positive, with CCI expecting the WA economy to grow by 6.5 per cent in 2007-08 and by 6 per cent over the medium term or next three years, ensuring that WA retains its place at the forefront of economic growth nationally.

As has been the case for the past six years, business investment remained at or near record levels, with the level of investment 37 per cent higher than the same time a year ago. CCI expects this trend to continue over the medium term as the train of investment projects continues to increase. By the end of 2007, there was more than $125 billion in investment projects waiting to be developed, which is equivalent to the size of the WA economy today.

There is evidence that the current six year investment cycle is starting to reap dividends, with export returns accelerating in recent quarters. Over the coming years, CCI expects exports to drive growth in the economy.

Labour constraints continue to plague the economy, and if measures are not adopted to boost the labour force, labour shortages have the potential to significantly impact on the ability of the economy to sustain its growth.

Nationally, economic conditions have continued to improve as growth picks up across most states, particularly in NSW and Victoria, which have been struggling to emerge from their housing-led slowdowns. Consensus forecasts compiled by CCI suggest that Australia's 16 year uninterrupted expansion cycle will continue, with GDP forecast to rise by 41/4 per cent in 2007-08 and by 4 per cent the year after.

Tight operating capacity has seen inflationary pressures mount, prompting the Reserve Bank to raise interest rates during November. However, the impact of the November rate increase remains to be seen, particularly in the non-mining states of New South Wales and Victoria, where growth is being led by consumers who are far more sensitive to interest rate rises.

With broader indicators of economic activity across Australia remaining very strong and price pressures continuing to rise, there is an expectation the RBA will raise interest rates in the near term. 

Internationally, concerns remain over the potential for a slowdown in the US economy, as mounting inflationary pressures and the effects of the US sub-prime mortgage market crisis continue to be felt.
However, prospects for the global economy remain positive, largely fuelled by the remarkable growth of the Chinese economy, and a solid outlook for the major economies of Japan and Europe.

BY JOHN NICOLAOU
Chief Economist

A new report by the state's peak business organisation, the Chamber of Commerce and Industry of WA, shows West Australians are by far the highest taxed in the nation, paying 17 per cent more than the national average.

The CCI report reconfirms WA's ranking as the highest taxing and least tax competitive state in the country. It shows the government's tax take has almost doubled to $5.7 billion over the past six years, with the average West Australian paying an extra $1,219 in tax annually since Labor came to office in 2001.

CCI does not accept Treasurer Eric Ripper's misleading rhetoric that WA is one of the most tax competitive states.   In 2005, Mr Ripper switched to measuring tax collections as a proportion of gross state product, which masked the position by making his revenue look smaller because of the massive value of WA resource exports.

The CCI comparison employs the more traditional measure which compares tax collections per head of population.

Meanwhile CCI has lodged a detailed pre-budget submission with the State Government which calls yet again for meaningful business tax relief and the development of broader policies to sustain the current economic boom.

The submission sets out CCI's concerns with the Government's current financial strategy including its rampant spending and unsustainable wages growth, which are largely being funded by overburdened taxpayers.

Business is seeking immediate and meaningful tax relief to improve the state's tax competitiveness, including -

• Cutting payroll tax by 0.5 per cent to 5.0 per cent in the 2008-09 budget to help create a business environment that promotes growth and development.
  
  
• Reducing stamp duty rates on property transactions to 2001 levels, indexation of tax thresholds for payroll tax and conveyance duty to stop bracket creep and further simplification of land tax.

CCI chief economist John Nicolaou said the reforms proposed by CCI were affordable and within the Government’s reach, given its surpluses and the strength of the state economy.

The tax cuts could be expected to cost around $529 million in 2008-09.

To put this into context, the government in its mid-year review increased its projected tax take for this financial year by $841 million. Mr Nicolaou said implementation of CCI's proposed package would still leave the government $312 million better off than originally forecast in its May budget.

The submission also highlights a range of financial management reforms which CCI said the Government needed to undertake as a matter of urgency.

It said that since the current government came to office seven years ago, general expenditure had increased by 45 per cent or $4.7 billion - a trend which appeared set to continue with spending tipped to blow out by a further $3.3 billion by 2010-11 if restraint was not shown.

Mr Nicolaou said it was imperative for the future strength and growth of the WA economy that the government found the will to deliver much needed economic reform.

"WA's current once-in-a-lifetime economic boom is creating many benefits, but also many challenges for businesses of all sizes. It is therefore vital the State Government uses today’s prosperity to lay a sound and responsible base for the future to ensure the economy remains strong for many years to come."

Meanwhile, the CCI submission seeks a commitment from the Government to address a range of issues that have the potential to threaten the state's economic prosperity. Severe labour shortages, for example, continue to plague WA business and remain a major barrier to further investment and expansion. With predictions WA will need an extra 400,000 workers over the next decade, the need for the State Government to take the lead on the issue is crucial.

CCI says housing affordability and residential land shortages also need to be resolved if interstate and overseas workers are to be attracted to WA to fill the career opportunities on offer.

The Government must also use its wealth to invest and plan for the future. CCI has compiled a list of economic and social infrastructure projects that will fuel greater investment and attract new businesses to WA, including the development of a state broadband network; expanding and upgrading Perth airport; redeveloping the Perth foreshore and the Northbridge Link project.

The CCI pre-budget submission said the government also must improve the state's competitiveness by agreeing to a new round of reforms addressing outstanding competition policy issues which are seen as an unnecessary clamp on growth and investment.

Top of the agenda should be the elimination of a range of anti-competitive rules and regulations including retail trading hours laws, the state's archaic potato marketing regulations and petrol price retailing.

Although the government has been unwilling to deliver meaningful tax relief and economic reform in previous years, CCI remains hopeful it will finally act in its May Budget - the last before the next state election.