Moody's: Western Australia's fiscal performance challenged by commodity price declines

Moody's Investors Service says that falling commodity prices and China's economic slowdown have shaved several billions of dollars from mining-oriented Western Australia's (WA) annual revenues, triggering a deterioration in its fiscal and debt metrics. 

Furthermore, although the state benefits from a financial buffer as a result of Australia's system of revenue equalization grants, its plan to eliminate its budget deficit by FY2018/19 will largely depend on it achieving targeted cost cuts, as a further slowdown in revenues remains a risk. 

Moody's conclusions were contained in its just-released report on Western Australia, titled "Western Australia Confronts a Slowing Resource Sector". The report examines four themes: the state's slowing economy; its significant budget flexibility; the outlook for equalization grants; and the political resolve needed for the state to hit its fiscal targets. 

Moody's report notes that the state government itself projects that WA's economic growth will fall to 2.0% in 2015/16, the slowest rate of expansion over the past 2 decades, from an estimated 3.25% the previous year. 

The decline primarily reflects a contraction of the domestic economy, but rising exports of iron ore as new production comes on line will partially offset this weakness over the medium term. As a result, the projected overall economic growth rates of 2.8% will be well below the average annual expansion of 5.3% seen over the past five years. 

Moody's further notes that WA's significant budgetary flexibility allows it to respond to lower revenues by adjusting tax rates and reducing spending, supporting its plan to progressively narrow its budget deficit and move into a surplus by FY2018/19. 

Also, WA's equalization grants are set to grow in the medium term. These grants, distributed from a national pool of shared tax receipts, are designed to shelter Australia's states from revenue downturns. WA's revenues from this source have declined for several years due to its track record of superior revenue growth, and will remain low in the short term due to a time lag in the application of the formula that compensates states for weaker revenues or larger expenditure burdens. However, WA's grants will grow strongly over the medium term in response to its current revenue slowdown. 

The Moody's report also says that WA will need political resolve to hit its fiscal targets. The state's ability to reduce spending and manage a more volatile revenue base will be critical to achieving its fiscal targets.