Bangkok--17 May--Moody's
Sydney, May 17, 2012 -- Moody's Investors Service says Western Australia, the country's fastest growing state, has strong prospects for further economic growth. These prospects, underpin its ample financial flexibility and will help it to tackle its budgetary challenges. These challenges include cost pressures related to the service demands and infrastructure needs of a rapidly growing population and a burgeoning resources sector. The impact of potentially greater volatility in royalty revenues from this resources-rich state, as well as in revenues from property-related taxes and Commonwealth Goods and Services Tax-backed (GST) grants complicate budget outcomes and underscore the greater need for budget buffers.
Moody's expects economic expansion in the state to continue to surpass the Australian average over the medium term, boosted by dynamic resources-based activities, which will amply support Western Australia's financial and debt operations. For 2011/12, Western Australia estimates that its economy is expected to grow by a healthy 6.0%, double the country's growth of 3.0%. The country's second-fastest growing state, Queensland, is estimated to expand by 4.3% this fiscal year.
Still, budgetary pressures are evident, as deficits (net lending/borrowing result) projected for the next two years are wider than the previous year's projections. A deficit equal to 6.8% of revenues is now projected for 2012/13 compared with the 4.3% projected in the 2011/12 budget. Similarly, for 2013/14, the budget now projects a deficit equal to 7.3% of revenues, higher the forecast of 2.9% made last year.
Over the medium term, however, Western Australia expects its financial performance to improve in part because it is now forecasting a surplus in 2015/16. The average deficit is now set to decline to 3.4% over the next four years compared with 4.8% a year ago and reflects assumptions that revenues will grow on average by 5.1%, more than the expected average growth of 4.4% in expenditures.
However, achieving this lower level of spending will be difficult. Over the past four years, expenditures have grown much faster, spurred in part by spending on healthcare (9.8% annual growth), the police force (6.9%), and disability programs (16.6%). This rate of growth in spending would have to slow significantly, if the state plans to meet its expenditure targets. In addition, wage outcomes of public sector workers tend to outpace those of other states which complicates expenditure reduction.
The state's government has responded to these pressures by announcing new efficiency targets in both the general government sector and public corporations, and, which will be vital in achieving budgetary improvements. These measures complement other actions taken previously which include voluntary separations, capped positions and wages, and increased iron ore fines. However, in its current budget, the government has also provided some relief in payroll taxes and electricity charge rebates which will partially offset these measures.
The state also faces increasing revenue volatility, given its growing reliance on royalties. which can fluctuate considerably due to the changes in commodity prices and exchange rates.
Conveyancing duties have also swung considerably in recent years--in line with developments in the housing market. These trends necessitate refinements to budgetary practices, if bottom lines are to be protected from swings in exchange rates, commodity prices, and housing activity. However, given the strong prospects for economic growth in the state, there is also upside risk to revenue performance.
Western Australia's announcement that it will set aside funds from royalties and other sources to create a "Future Fund" is a step in the right direction. While the initial size of the fund is small and there could be challenges in building it up in the short term, the move indicates that the state is committed to addressing its budgetary challenges.
As part of Moody's normal monitoring process, the rating agency will conduct an in-depth analysis of Western Australia's budget and its medium-term impact on the state's financial and debt profile.
The announcement represents an update to markets and does not constitute a rating action.