Western Australia is set to post an eye-popping surplus of almost $8 billion this year, according to ratings agency S&P, as the state rakes in windfall gains from the iron ore boom and record gas prices.
As federal Treasurer Josh Frydenberg today prepares to hand down a federal budget mired in red ink, S&P said WA had one of the strongest balance sheets of any government in the world.
The New York-based ratings agency said the state was poised to achieve an operating surplus of $7.92 billion for the 12 months to June 30.
If realised, the result would be the biggest surplus for any state in Australia’s history and would eclipse the $5.8 billion figure recorded by WA last financial year — itself a record.
Beyond this financial year, S&P was forecasting WA to collectively rack up more than $10 billion of surpluses over 2022–23 and 2023–24 as it predicted iron ore prices to stay high.
Although capital spending on big-ticket infrastructure projects, such as rail lines and desalination plants, was expected to hit $8 billion within a few years, the agency said WA would still have money left over to pay down debt.
The forecasts have prompted the state opposition to liken WA Premier Mark McGowan to Ebenezer Scrooge, saying he was amassing a fortune while parts of the economy struggled.
S&P house view 'more optimistic'
Martin Foo, an associate director at S&P, cautioned that the agency's "house view" was generally more optimistic than the WA government's, meaning its forecast surplus could be higher than the state's own expectations.
Despite this, Mr Foo said it was beyond question that WA's finances were among the strongest of any government in the world.
He said the government was basking in the gains of windfall commodity prices, with markets for exports such as iron ore, liquefied natural gas, nickel, and lithium at historic highs.
As well as this, Mr Foo said revenue from other taxes, including stamp duty and payroll tax, were flooding in to further swell the government's coffers.
But he pointed out that the budget was benefiting from years of relatively tight spending restraint, which included limited public sector wage rises.
"These are very strong figures historically and also compared to other states," Mr Foo said.
"One of the interesting things WA has done is asked state-owned corporations to suspend their dividend payments to the general government.
"As a credit rating agency, we're used to all sorts of people convincing us that their surpluses are huge."
A 'chance for reform'
Opposition treasury spokesperson MLC Steve Thomas said he expected the government to "stash" money beyond the current financial year to ensure the surplus was minimised.
Dr Thomas said the final figure was still likely to exceed $5 billion, which he described as a "massive amount of money".
"For me, what this indicates is an opportunity to engage in real economic reform," he said.
"Let's start looking at payroll tax, stamp duties, all of those things.
"They can't put any more money into infrastructure because they don't have the people to do the work."
Dr Thomas said that for all the government's riches the state was far too reliant on iron ore royalties, which tallied more than $12 billion in 2020–21 — almost a quarter of general government collections.
He said there was a pressing need for the government to diversify the state's economy to ensure it could better cope with the inevitable decline of the iron ore trade.
He said the war in Ukraine and geopolitical tensions in North Asia showed circumstances could change quickly.
"We're very targeted in terms of what's got us to this point," he said.
"Kudos to the iron ore industry — revenues are very high.
"They have to smooth out the economy."
State deserves credit: business
Aaron Morey, chief economist at the WA Chamber of Commerce and Industry, said there was little doubt the state relied heavily on trade with China — sales of iron ore in particular.
He said WA was already taking steps to offset some of the risks inherent in the high iron ore price, making conversation assumptions and keeping a lid on expenses.
In the short-to-medium term, he said the state should look to maximise the benefits from iron ore trading while developing other industries such as green hydrogen and critical minerals, such as for batteries.
And he echoed calls for reforms to the state’s tax system, saying anything that helped those industries get up and running would fast-track the diversification.
"We're a trading economy and Western Australia more than any other state is very much reliant on international trade," Mr Morey said.
"We can continue to have a really strong mining sector, in particular iron ore, at the same time as we develop other industries."
