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The recessionary horror of the Western Australian economy
Western Australia is in a deep and increasingly nasty recession. There are no signs that the economy is near a bottom which is disconcerting. The plunge in mining investment and the slump in commodity prices have hit WA hard and the economic scorecard is, quite simply, miserable.
During 2008, the unemployment rate in WA fell to a stunning low of 2.3 per cent. After a temporary rise with the GFC, the unemployment rate was 3.5 per cent during 2012. This was the lowest in Australia by a large margin. Most recently, unemployment spiked to 6.3 per cent which is now third highest in Australia, behind only South Australia and Tasmania. Since the middle of 2015, there has been no increase in employment levels.
State final demand, which is effectively GDP excluding net exports, peaked in September 2012 and since then, has been trending lower. From that peak, State final demand has slumped 13.2 per cent. While exports of iron ore and other commodities are strong and adding to activity in WA, from the perspective of private and public sector spending and investment, the economy is going backwards.
Why the Turnbull government's plan to issue 30-year bonds is an unnecessary risk
The Turnbull government has indicated that it will start issuing 30-year government bonds.
In layperson’s terms, this means the government will be borrowing money for a 30-year fixed term, paying interest every six months over those 30 years to the holder of those bonds. This locks in interest payments as a part of the budget bottom line right through to 2046 and probably beyond. The government will use the revenue from those borrowings to fund the budget deficit and maturities of existing bonds. The deficit continues to hold at levels well above the levels the Coalition government inherited from the Labor party when it won the 2013 election.
The decision by the government to borrow money for such an extended duration – via the Australian Office of Financial Management (AOFM) – sits oddly with the rhetoric from Malcolm Turnbull and Scott Morrison about their core objective of “budget repair” and the goals of returning to surplus. If these objectives were genuinely part of the government’s economic strategy, there would be no need to borrow money for 30 years. The current 25-year bonds are more than sufficient to cover the government’s deficit requirements, especially if the projections for a return to surplus in about three years are still relevant.