State should thank iron ore for helping fund COVID fight

Article by Steve Thomas courtesy of the West Australian

WA Treasurer Ben Wyatt wrote an opinion piece in The West Australian yesterday in which he said that the Eastern States should thank WA for keeping the national economy strong.

He was right to suggest that successive Federal governments of both persuasions have increasingly taken control of revenue sources, aided and abetted by the High Court. He was also correct when he stated that “in 2019-20 around half of all Australian exports were from WA, with around half of that from iron alone”.

Whilst the Treasurer was quick to point out the benefits the Commonwealth got from the iron ore industry in the West, he has been reluctant to credit the industry for the good financial position the State finds itself in.

In February 2019 when the iron ore price passed US$90 a tonne, I asked Mr Wyatt in Parliament how much additional revenue his Government would receive if the price stayed there. He responded by saying that the scenario “has not been modelled, as this assumption is highly unrealistic”.

The iron ore price has mostly stayed above US$90 in the 18 months since then, reaping a windfall of billions of dollars above the budgeted price. The current iron ore price is over US$120 a tonne, but the last State
Budget estimated it at US$65.60 for the 2020-21 financial year.

The Government acknowledges that each extra dollar in price is worth $81 million to its annual budget, which means at nearly $60 over the Budget prediction the State would reap $4.8 billion extra over a year if the price stays high. That’s $400 million a month of unbudgeted cash to spend.

The State is reaping a royalties bonanza that is propping up its books, and the Treasurer should be thankful to the iron ore sector rather than claiming the windfall is down to financial management. Mr Wyatt’s claim that “the States have, quite rightly, been responsible for the vast majority of the crisis response to the coronavirus” also needs to be tested. Our Australian governments, both State and Federal, have been lauded for their response to the COVID-19 pandemic, which has been appropriately aimed primarily at saving lives.

The secondary aim however, that of limiting the economic damage by maintaining employment and supplementing incomes, has been the one that has resulted in the greatest financial costs to those governments. This is particularly so of the Morrison Federal Government, whose economic rescue package when combined with the actions of the Reserve Bank come at a combined cost to date of $320 billion.

The JobKeeper and JobSeeker programs have been a major part of those costs, which have pushed the Commonwealth into extreme Budget deficits and gross debt blowing out towards a trillion dollars. By comparison the State COVID response package has hit $5.5 billion, which will be completely paid for by increased royalties if the iron ore price stays high until the election next year. So yes, the WA economy punches well above its weight, and the Commonwealth should be grateful to Western Australia’s iron ore industry for the billions in additional taxes it reaps on the profits of our miners.

But it is the State Government who is reaping the greatest political reward. As a result of a dam collapse in Brazil, iron ore prices sat consistently at higher levels than predicted and delivered an extra $2.2 billion to our State’s Budget over 2019. Through the coronavirus crisis of 2020 China’s stimulus spending has kept the price high and looks like adding another $3 billion.

The McGowan Government’s COVID response is largely already paid
for thanks to the iron ore miners of WA. And while they are being thankful, Scott Morrison’s GST fix has also provided a massive boost to the State Budget. There is plenty to be grateful for if you are the Government of Western Australia.

Dr Steve Thomas is WA shadow minister for finance

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