Report

The consequences of fiscal austerity in Western Australia

3 May 2018
Description

This report critically responds to the call for fiscal austerity and public sector downsizing, being made in response to the emergence of fiscal deficits in Western Australia (WA). Those deficits arose in the wake of the slowdown in mining activity and corresponding deceleration of employment and economic growth. Many observers immediately conclude that the only response to a deficit must be some combination of cutting program spending, reducing public sector employment, freezing or reducing public sector wages, and selling public assets.

In reality, there should be no alarm about the WA state deficit. To the contrary, that deficit merely confirms that state fiscal policy is in fact doing what it is supposed to: namely, provide essential public services that make a key contribution to quality of life and the health of communities, and provide a solid base for private-sector economic activity (including helping to stabilise private-sector activity through its inevitable ups and downs). Knee-jerk spending cuts or asset sales in response to deficits that are caused by cyclical developments in the private-sector economy would only make matters worse in the short-run – and they would significantly undermine the public sector’s capacity to provide sustainable public services in the long-run.

This paper explains the important economic functions played by the automatic stabilisers that are built into the tax-and-spending system of the state economy. It discusses the normal and even desirable functions of public debt, and catalogues the ongoing economic and social value of good quality public sector employment. All of these factors provide needed context for debates over the direction of fiscal policy in WA in the wake of the mining downturn and subsequent recession.

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2018
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