The Consequences of Fiscal Austerity in WA
Western Australia’s recent budget deficit is the result – not the cause – of deteriorating economic conditions.
And contrary to calls for fiscal austerity and public sector downsizing, being made in response to the emergence of fiscal deficits in WA, the report showed that budget deficits played a useful role in stabilizing the economy during times of economic downturn, and will automatically recede as the economy recovers.
That is the message of a new report on WA's fiscal choices, by Dr. Cameron Murray and Troy Henderson, published by the Centre for Future Work.
“In reality there should be no alarm about the WA state deficit. Deficits are acceptable, and positive, during periods of weak economic growth.” says the Australia Institute’s Senior Economist, Dr. Cameron Murray.
“In fact, that deficit merely confirms that state fiscal policy is doing what it is supposed to: providing essential public services and providing a solid base for private-sector economic activity.”
“It is wrong to immediately conclude that the only response to a deficit must be some combination of cutting spending, reducing public sector employment, freezing or reducing public sector wages, and selling public assets.”
The report found public sector payrolls grew modestly through the 2014-17 period. That modest growth, in contrast to the contraction in private payrolls, supported a cumulative total of $3 billion dollars in additional GDP; $1.3 billion in additional consumer spending; and $450 million in additional state revenues.“During WA’s recession we’ve seen compensation growth slow down in both the public and private sectors,” says Murray.
“Importantly however, the modest, continuing wage growth we did see in the public sector acted as an automatic stabiliser, reducing the severity of WA’s downturn.”
Total economic activity, including economic activity in the private sector, was also found to be higher as a result of the government slowly but steadily increasing its spending on public servants and the services they provide.
“Those deficits arose in the wake of the slowdown in mining activity and corresponding deceleration of employment and economic growth, and over-zealous fiscal austerity is not the solution.”
“Continuing growth in public sector wages and maintaining public spending during weak economic periods generates positive spillover effects for the rest of the economy,” says Murray.
More recently, positive signs of recovery in the state economy are quickly and automatically producing a reduction in the size of the deficit. The report recommends the state government focus on supporting that continuing recovery, rather than reducing the government’s own contribution to it.
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