OPINION: The state’s strong economic performance puts it in the crosshairs of the other states chasing more of the tax pie.
If China’s latest attempt to stimulate economic growth works as planned, then Western Australia’s difference with the rest of Australia could become even more annoying for the other states and fire up the never-ending GST debate.
At its simplest, a stronger Chinese economy means greater demand for Australian exports, an area of the national economy dominated by WA, with its 11 per cent of the population generating 40 per cent of the country’s exports.
Export income, mainly from iron ore, is what separates WA from the other states, which want a bigger share of the goods and services tax collected in WA rather than encouraging growth of their own export industries.
The small population and big export numbers, which have barely changed in the past 20 years, surfaced again earlier this month as China unveiled its plan to encourage greater investment and job creation, especially in the moribund property sector.
More building in China means more iron ore from WA, which explains the sudden surge in iron ore company share prices such as Fortescue, which has risen by 25 per cent over the past few weeks.
But just as the China-WA connection was being reinforced by policy changes in Beijing, the latest State-of-the-States report from Westpac Bank highlighted the wide (and growing) disparity between Australia’s east and west coasts.
Loaded with graphs, the bank’s analysis highlighted two significant trends: the continued rise of WA as the powerhouse of the Australian economy, and the alarming growth of government spending as a share of the economy.
According to Westpac, public demand, which is essentially all forms of government spending, rose in the June quarter to a record 27.3 per cent of the national economy, up from about 22 per cent 10 years ago and more than the government spending share during the COVID years.
The government’s share of the economy, and the parallel increase in the number of government employees, could continue to grow, which is bad news for the economy as most government activity does not create wealth, simply acting as a cost passed on to the private sector.
Westpac said public consumption, which included the provision of subsidised goods and services, grew by 1.4 per cent in the June quarter and 4.7 per cent in the year to June 30.
That growth reflected the expansion of cash-consuming programs such as the National Disability Insurance Scheme.
“More growth (in government spending) can be expected as yet another round of cost of living measures come into effect at both the state and federal level,” the bank said.
Politically popular, the redistribution of tax revenue by Australian governments does nothing to stimulate growth, which has come to a halt in Victoria, the heaviest taxing state.
Next year, if China can grow as planned and falling interest rates stimulate economic activity in the US and Europe, WA’s outperformance will become even more obvious.
Westpac said annual growth in the WA economy was “tracking more than two and a half times faster than the pace nationally”.
Meanwhile, in Melbourne there is a growing awareness that Victoria is in deep trouble, with property prices falling even as they rise in the rest of the country, and new business growth in the state stalled.
High taxes to pay for government spending and cost of living handouts are increasingly seen as the immediate problem, though the roots can be traced back to poorly conceived government building programs.
Ross McEwan, a former chief executive of National Australia Bank and a BHP director, told the Australian Financial Review newspaper there was no growth in the Melbourne housing market because it was impossible to make money out of development at a retail level.
No single economic measure better illustrates the difference between WA and Victoria than property prices, which rose by 24 per cent in Perth last financial year and fell by 1.4 per cent in Victoria.
But that divergence might not be good news for WA as it is forced to defend its share of GST from a fresh round of claims from Victoria and other states.
Loss of steam
The dead hand of government can be clearly seen in another part of the economy, the fumbling attempt to replace oil and gas by switching to renewable sources of energy, with electric vehicles the most obvious example.
The failure of EV sales to meet the optimistic projections of a few years ago is well understood, but less obvious is the floundering effort to increase the production of alternative fuels and the minerals required to displace oil, gas and coal.
Hydrogen, heavily promoted by iron ore billionaire Andrew Forrest and the federal government, has become a showpiece of the greatest of all business failings, over-promising and under-delivering.
Mr Forrest has mothballed most of his investments in green hydrogen, material made by using renewable energy to split water atoms, followed by big energy utility Origin dumping its hydrogen plans.
Once hailed as Australia’s best chance of becoming a major hydrogen producer, Origin discovered it was technically possible but financially unwise. A similar situation is evolving in the business of producing the metals needed if the energy transition away from fossil fuels is to work or go the over-promised way of EVs.
Three recent reports highlighted the extent of the problem, starting with Rio Tinto boss Jakob Stausholm warning that the western world was failing to make inroads with energy transition.
“Most of the world is not moving fast enough to electricity,” Mr Stausholm said at Metals Week, an annual conference organised by the London Metal Exchange.
He was particularly critical of the US government’s new energy stimulus plan, the Inflation Reduction Act, which was yet to have a significant impact.
“While it’s still too early to tell what the outcome of policies like the IRA will be, we haven’t yet seen any significant increase in (new energy) output,” he said.
BHP and Chile’s big copper producer, Antofagasta, made the same point at Metals Week, with the chief executive of Antofagasta, Ivan Arriagada, warning that there was a disconnect between government policies, which called for more mines but were slow to issue development permits.
Mr Arriagada said that over the next decade the world would need to add the equivalent of Chile’s entire copper output and if it did not there was a risk that “energy transition will be delayed”.
