The Consequences of Fiscal Austerity in Western Australia

by Cameron Murray and Troy Henderson

This report critically responds to the call for fiscal austerity and public sector downsizing, being made in response to the emergence of fiscal deficits in Western Australia (WA). Those deficits arose in the wake of the slowdown in mining activity and corresponding deceleration of employment and economic growth. Many observers immediately conclude that the only response to a deficit must be some combination of cutting program spending, reducing public sector employment, freezing or reducing public sector wages, and selling public assets.

In reality, there should be no alarm about the WA state deficit. To the contrary, that deficit merely confirms that state fiscal policy is in fact doing what it is supposed to: namely, provide essential public services that make a key contribution to quality of life and the health of communities, and provide a solid base for private-sector economic activity (including helping to stabilise private-sector activity through its inevitable ups and downs). Knee-jerk spending cuts or asset sales in response to deficits that are caused by cyclical developments in the private-sector economy would only make matters worse in the short-run – and they would significantly undermine the public sector’s capacity to provide sustainable public services in the long-run.

This paper explains the important economic functions played by the automatic stabilisers that are built into the tax-and-spending system of the state economy. It discusses the normal and even desirable functions of public debt, and catalogues the ongoing economic and social value of good quality public sector employment. All of these factors provide needed context for debates over the direction of fiscal policy in WA in the wake of the mining downturn and subsequent recession.

The key findings and recommendations of the report include:

  1. A budget surplus can be a very effective way to slow economic growth, especially during a recession. The assumption that government should achieve a surplus as quickly as possible is fundamentally wrong.
  2. Deficits are acceptable – and positive – during periods of weak economic growth. Attempts to forcibly repair budget deficits during recessions will make the economic situation worse.
  3. Western Australia’s recent budget deficit is the result – not the cause – of deteriorating economic conditions. The budget deficit has helped to stabilise overall economic conditions in WA in an economically efficient manner.
  4. WA’s deficit and debt service charges are not large relative to the productive capacity of the state economy, nor to the overall revenue base of the state government. Indeed, WA’s interest payments are smaller as a share of total state government revenue than is the case for many large corporations and millions of households.
  5. The automatic stabiliser function of the budget should be amplified through additional discretionary counter-cyclical policy measures, such as increased government spending and investment during economic slumps.
  6. Privatisation of state assets is an accounting trick that does not actually improve the deficit (instead, it trades one asset for another on the government’s balance sheet), and will weaken the government’s fiscal position if the privatised asset generated revenue at a higher margin than the government pays interest on its debt.
  7. Public sector employment in WA has stagnated since the onset of the recession in 2013. In fact, Western Australia has the third lowest level of total public sector employment (14.5 percent) as a share of total employment of any state. The assumption that the state’s public sector is bloated is factually wrong. 
  8. Between 2013 and 2017, state public sector employment was essentially stable (at around 110,600 full-time equivalent workers). But during this period, WA’s resident population continued to increase (adding around 100,000 new residents). Therefore, WA’s public sector workforce has not kept up with the population it must serve.
  9. During the 2014 to 2017 recession, labour incomes in the private sector declined, shrinking at an average annual rate of 2.4 percent per year. In contrast, total wages and salaries paid in the public sector continued to grow at a modest but positive rate (of 3.9 percent per year). This continued, normal growth in public sector income helped to moderate the negative economic effects of the recession in the private sector.
  10. Like other forms of government spending, public sector payrolls acted as an automatic stabiliser during the recession – despite deliberate (and ill-advised) government efforts to suppress public expenditure. If public compensation had declined at the same rate as private compensation between 2014 and 2017, consumer spending, state output, and even the state government’s own revenues would have been lower than they were.

Full report