Western Australian Economic and Fiscal Update June 2019 Hon Ben - PowerPoint PPT Presentation

Western Australian Economic and Fiscal Update June 2019 Hon Ben Wyatt MLA Treasurer

Key Points • Economic growth (GSP) in 2018-19 revised down from 3% to 2% – Mainly due to weaker than expected household consumption – In response, 2019-20 Budget minimises the increase in household fees and charges • GSP growth forecast to lift to 3.5% in 2019-20 – Mainly due to rebound in business investment – Increased Government investment (particularly in roads and rail) also contributing • Housing (both new construction and established) remains soft – but lending commitments appear to have troughed – 2019-20 Budget includes a temporary relaxation of Keystart eligibility criteria to stimulate activity 1

Key Points Cont. • Estimated operating surplus of $553m in 2018-19 – $1.2b turnaround from $674m deficit forecast in the Mid-year Review • March quarter results show we are on track – Expense growth of just 1.6% to end-March • Operating surpluses forecast across entire forward estimates period – Including $1.5b surplus in 2019-20 • Net debt forecast to peak at 30 June 2020 and then gradually decline – WA the only State forecasting net debt to peak 2

WA Economy Economy forecast to grow by 3.5% in 2019-20 and 3% p.a. out to 2022-23, underpinned by a strengthening domestic economy STATE FINAL DEMAND GROSS STATE PRODUCT Western Australia, Annual Levels % Western Australia, Annual Growth $ Billion 12 250 Forecast Forecast 10 200 Long-run 8 average growth = 4.3% 6 150 4 2 100 0 50 -2 -4 2007-08 2010-11 2013-14 2016-17 2019-20 2022-23 0 2007-08 2010-11 2013-14 2016-17 2019-20 2022-23 3

Cautious Consumers – But Confidence Improving HOUSEHOLD SAVING RATIO • WA households have been % of Income 20 cautious over the last decade – reflected in a high savings rate, well Western Australia 15 above the national average Australia • This has been acting as a drag on 10 household consumption • However, consumer confidence has 5 been trending upwards since late 2017, and is expected to support a 0 gradual increase in household spending in the medium term -5 Jun-90 Jun-94 Jun-98 Jun-02 Jun-06 Jun-10 Jun-14 Jun-18 4

Housing Sector Housing finance affected by banks tightening access to credit nationally – but lending • commitments appear to have troughed Keystart income limits have been temporarily increased (1 July to 31 Dec 2019) • WA BUILDING APPROVALS & LENDING HOUSING FINANCE (VALUE) % (3-month sum, Year-ended growth) % 110 60 No. of Building Approvals Australia No. of Lending Commitments to Owner Occupiers 50 Western Australia 90 40 70 30 50 20 10 30 0 10 -10 -10 -20 -30 -30 -40 -50 Mar-07 Mar-10 Mar-13 Mar-16 Mar-19 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Mar-19 5

Housing Sector Cont. The rental vacancy rate has declined sharply, which has increased rents and is expected to support construction and prices as renters look to build MEDIAN RENT – HOUSES RENTAL MARKET % %, inverse Perth Supply and Vacancy Rate 30 14,000 0 Total Rental Listings (LHS) 1 25 Annual average Vacancy Rate (RHS) 12,000 Year-on-year 20 2 10,000 3 15 4 10 8,000 5 5 6,000 6 0 7 -5 4,000 8 -10 2,000 9 -15 0 10 -20 Mar-11 Mar-13 Mar-15 Mar-17 Mar-19 Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 Mar-19 6

Business Investment WESTERN AUSTRALIAN BUSINESS INVESTMENT Annual Levels $ Billion 90 Potential Investment The State’s resource production • 80 Iron Ore Forecast capacity has been significantly Lithium 70 All Other Major Project Investment expanded since the early 2000s Minor Project Investment 60 Business investment normalised as • Other 50 Non-mining projects moved from construction to 40 production 30 Return to growth from 2019-20 • supported by $16.3b in new and 20 replacement iron ore and lithium 10 mines 0 1989-90 1997-98 2005-06 2013-14 2022-23 7

Business Investment Cont. Lithium mining and manufacturing is a promising emerging industry • Western Australia accounts for 65% of global lithium production, and demand is • expected to increase considerably over the next decade ESTIMATED GLOBAL LITHIUM DEMAND WESTERN AUSTRALIAN LITHIUM PRODUCTION 2018-26 2007-23 Thousands of tonnes of LCE Million tonnes, annual sum 1,800 5.0 1,634 1,600 4.5 Lithium concentrate sales, WA 1,400 4.0 1,200 3.5 1,009 1,000 777 3.0 800 2.5 600 400 2.0 234 Forecast 200 1.5 0 1.0 low base high 2018 2026 0.5 Estimated Actual Roskill Forecast 0.0 Jun-07 Jun-11 Jun-15 Jun-19 Jun-23 8

Record Mine Site Employment as Projects Ramp Up Upturn in mine site employment across key commodities MINE SITE EMPLOYMENT SEEK NEW JOB ADVERTISEMENTS, WA '000 Total Employment, Annual Average Levels Annual growth, April 2019 140 Other Iron Ore Gold Lithium, Tin & Tantalum Mining, Resources & Energy 120 Healthcare & Medical 100 Government & Defence 80 Legal 60 Education & Training 40 CEO & General Management 20 Community Services & Development % 0 0 0.4 0.8 1.2 Dec-02 Dec-06 Dec-10 Dec-14 Dec-18 9

Outlook for WA’s Key Trading Partner Demand conditions in China remain favourable CHINA ACTIVITY % Growth % Growth Qrtly YoY Qrtly YoY & Iron ore price WA IRON ORE EXPORTS 25 140 contained in Chinese exports to US China secondary indicator, RHS 20 Iron ore price, LHS million 825 tonnes 90 15 Total WA iron ore exports 10 40 5 15 million Iron ore embodied in China's tonnes 0 exports of steel to the US -10 -5 -60 -10 Dec-10 Aug-12 Apr-14 Dec-15 Aug-17 Apr-19 10

General Government Revenue Revenue has rebounded – but 2019-20 Budget predicated on modest revenue growth of 2.8% p.a, underpinned by conservative commodity price forecasts % 14 Forecast 12 10 Decade average Underlying = 4% 8 growth 6 Average growth = 2.8% 4 4.8 2 0 -2 -4 -6 2007-08 2010-11 2013-14 2016-17 2019-20 2022-23 11

Payroll Tax Has Rebounded Supported by Hiring in the Resources Sector PAYROLL TAX, LARGEST TAXPAYING PAYROLL TAX INDUSTRIES Annual Growth % $m Rolling annual sum 25 Forecast 1,000 Mining 20 Long-run avg = 7.6% Construction Forecast 800 avg = 6.5% Admin & support 15 Professional services Manufacturing 600 10 5 400 0 200 -5 0 -10 Apr-04 Apr-07 Apr-10 Apr-13 Apr-16 Apr-19 1997-98 2002-03 2007-08 2012-13 2017-18 2022-23 12

Iron Ore Price 2019-20 Budget assumes an iron ore price of $US73.50/tonne in 2019-20 and $US63.70 by 2021-22 – upside risk IRON ORE PRICE FORECASTS BENCHMARK IRON ORE PRICE $US/t $US per tonne 110 90 Budget cut-off Actual 105 date (8 Apr) Forward Contracts 80 100 Budget Approach Consensus 95 MYR Approach 70 Cyclone Veronica 90 Record China steel output; iron ore 85 60 inventories fall sharply 2021-22: 2019-20: 2020-21: 2022-23: 80 $US63.7 $US73.5 $US65.6 $US63.7 Initial response to Vale disaster 50 75 70 40 24-Jan 13-Feb 05-Mar 25-Mar 14-Apr 04-May 24-May 2018-19 2019-20 2020-21 2021-22 2022-23 Jul-18 Jul-19 Jul-20 Jul-21 Jul-22 Jul-23 13

GST Reform GST REFORM IMPACT Proportion of population share • WA’s GST share will never again 80% Forecast Commonwealth-funded fall below 70 cents in the dollar, 70% 70% floor up from 30 cents a few years ago GST grant gains from 60% reform • Commonwealth to provide top-up GST grants (pre-reform) 50% payments totalling an estimated 40% $5 billion to 2021-22 30% • From 2022-23, the 70% floor will 20% be delivered through legislated increases to our GST grants 10% 0% 2013-14 2016-17 2019-20 2022-23 14

GST Reform Cont. Higher than expected iron ore prices now have no impact on WA’s GST-related revenue • Under the pre-reform system, WA lost $ Billion 7 around 90% of additional iron ore GST grants (pre-reform) royalty income (over time) GST grant gains from reform 6 Commonwealth-funded 70% floor • Under the GST reforms, reduced 5 GST grants from higher iron ore prices 4 are fully offset by increased top-up grants (while WA’s GST relativity is 3 below 70%) 2 • The new benchmark and floors 1 provide insurance that, over the forward estimates, WA will retain all 0 $80US/t $100US/t $120US/t royalty increases from the higher iron ore price 15

General Government Expenses Budget strategy driven by the Government’s strong focus on expense management % 14 Forecast 12 10 Decade average = 5.9% 8 6 Underlying growth 4 Average growth = 1.3% 2 2.4 0 2007-08 2010-11 2013-14 2016-17 2019-20 2022-23 16

Fiscal Position • Return to operating surplus in 2018-19, two years earlier than forecast in last year’s Budget • Total public sector cash surplus forecast from 2020-21 – first since 2007-08 $ Billion 4 Forecast General Government Operating Balance 3 Total Public Sector Cash Surplus/Deficit 2 1 - -1 -2 -3 -4 -5 2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20 2021-22 17

Infrastructure Investment Asset Investment Program totals $22.8b over next four years, with over one third of this on roads and rail ASSET INVESTMENT PROGRAM Total Public Sector $ Billion METRONET Other roads and rail Forecast 8 Health Education Electricity Water Corporation 7 All other 6 5 4 3 2 1 0 2013-14 2015-16 2017-18 2019-20 2021-22 18