WA State Budget 2024: Infrastructure spend, cost-of-living measures may be inflationary but S&P gives a tick

Economists warn the WA Government’s Budget could be inflationary thanks to record spending on infrastructure and a raft of cost-of-living measures but an influential credit agency says high iron ore prices are likely to cushion its impact. Treasurer Rita Saffioti, handing down her first Budget on Thursday, said she did not expect the Budget to risk keeping inflation higher for longer — which many fear will force the Reserve Bank of Australia to keep interest rates on hold possibly into next year — because many measures were targeted. The Government is pushing ahead with another raft of electricity credits, as well as concessions to parents of school children. “All the economic commentators say (the inflation challenge) is about housing and one of the constant threats that impacts the proposed decline of CPI is housing,” Ms Saffioti said. “That’s why we’re pouring so much into increasing housing supply to try and reduce that impact on inflation.” In a bid to combat rising housing issues in the State amid nation-leading population growth, the Government revealed changes to stamp duty concessions and $843 million for housing supply measures, while $12.1b more has been set aside for infrastructure. Committee for Economic Development Australia chief economist Cassandra Winzar said some projects may face delays given the skills shortage and may need to be reviewed to ensure their timing was not crowding out investment in priority areas like housing. “(The) large cost-of-living relief package and record infrastructure may add to inflation,” she said. “While there is a need to provide support to those doing it tough, we would have liked to see payments more targeted towards lower-income households.” Influential ratings agency S&P Global said the State’s economy was stronger than nearly all domestic and global peers, and the Budget supported its triple-A credit rating. S&P also suggested WA Treasury’s forecasts for iron ore were too conservative, and would likely be higher, offsetting spending elsewhere and limiting debt growth. WA Treasury has forecast Perth’s inflation rate to be 3 per cent by mid-2025 and then 2.5 per cent by mid-2026, both excluding electricity given the Government’s credits, down from 3.4 per cent two months ago. The Reserve Bank of Australia’s target is between 2 and 3 per cent. All levels of Government are under intense pressure to ensure Budgets are well-balanced and don’t further feed inflation after Reserve Bank governor Michele Bullock earlier this week warned interest rates may need to stay on hold for longer given overall inflation was proving particularly persistent. “Inflation must remain front of mind in any spending decisions,” Ms Winzar said, a sentiment echoed by EY senior economist Paula Gadsby. “The above (RBA) target national inflation rate cannot be ignored,” Ms Gadsby said. “Heading into the election period, it is tempting for the Government to share the state’s strong financial performance with WA households by providing cost of living relief. “We believe this should be carefully targeted to assist those in most need, otherwise it will make the Reserve Bank’s battle against inflation harder.” Ms Gadsby said it was critical structural economic imbalances were delivered despite the strong budgetary position WA was in. “Stronger-than-forecast commodity prices have been a boon for WA – but are not guaranteed into the future.,” she said. Meanwhile, WA Treasury is also tipping the worst may soon be over for embattled nickel prices, which have taken a beating — forcing WA producers to close or scale back projects — as cheaper, less “green” Indonesian product floods the market. Forecasts in the Budget suggest prices will bottom out this year, and reach $US20,000 per tonne by June 2028 as the oversupply dissipates. State baseline forecasts for the price of iron ore, its key economy driver, remain conservative but over the forward estimates from the 2026 to 2028 financial years have been bumped up from $US66 per tonne to $US71/t. They’re poised to finish 2023-24 at $US116.10/t and slide to $US75/t in 2024-25, compared to about $US100/t. Total revenue from iron ore royalties is forecast to hit $9.85b in 2023-24 but fall 35.7 per cent to $6.3b in 2024-25 on assumptions the price will revert to its long-run average from November this year. Elsewhere, lithium royalties are thought to bottom out at $378m in 2024-25 before gradually recovering to $623m in 2027-28, while nickel is also thought to slide from $108m in 2023-24 to bottom out at just $88m in 2024-25. Other commodity forecasts are mixed — lithium producers are expected to battle a smaller pool, with Australia’s share of global lithium supply likely to fall from about 39 per cent in 2023 to about 29 per cent by 2028 as more supply from Argentina and Zimbabwe kicks in. The outlook is brighter for gold, prices for which are expected to stay around $US2300/oz in 2024-25 given the geopolitical tensions and expectations of rate cuts reinforcing gold’s appeal as a secure asset.